Interest Rate versus a Penalty Rate - You need to know the difference
One thing that seems to catch some people unawares is the interest rate that is quoted for a tax sale. There are two types of interest rates - one is an interest rate and one is a penalty. Why do you care? Because it can make a substantial difference in your return on investment.
Lets assume there are two different tax lien sales, one has a 10% interest rate and the other has a 10% penalty. You buy a $1,000 lien in both sales and both liens redeem exactly 90 days later. Which one was the better investment? Let’s do the numbers.
The 10% interest rate lien will earn the following: $1,000 times 10% for 90 days will earn $24.70 (1000 X .10/365*90)=24.70. A 10% percent penalty for 90 days (or 180, 0r 365) will earn $100.00 (1000 X .10)=100. Which would you rather have? The anualized return on the penalty is 40.6% (100 / 90 X 365 /1000). So, obviously 10% is not always 10%. You need to know if you are earning a penalty or an interest rate.
Some of the penalty states are SC, TX, IL and IN. there are others. Check it out and know what you are getting.
By John Lane
To learn more about Tax Lien Investing, please visit www.TaxLienInvestingGuide.com
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