Investors today are facing the toughest economy in decades and, as a result, low hedge fund returns. So how are you supposed to get yesterday’s returns in today’s economy? What will be the next big source of investment income? These are the questions that the best professionals ask. However, the answer may be right under your nose.

For one hundred and fifty years, counties and municipalities in this country have been in the business of selling tax liens, which provide high returns to interested and knowledgeable investors. This type of investment fits very well with multi-strategy hedge funds, as well as those focused on the credit and real estate markets.

Understand the process:

However, before investors can take the plunge into this slightly unique market, they need to understand the concepts behind it. One of these is the tax lien receivable, which is simply the right to collect taxes on a property. The reason this term is so important to this market is because once a homeowner is delinquent on property taxes, after a while, the bank has the right to lien the property and sell that lien. . The buyer can collect back taxes from the property owner.

Because much of a government’s ability to allocate funds depends on the collection of property taxes, non-payment by individuals is highly damaging. Therefore, governments must seek quick solutions to alleviate the loss of revenue. If not, they must cut spending or raise property taxes for those who continually meet their obligations. It is therefore not surprising that many governments seize the opportunity to sell debt, which is collateralized by the property itself.

So why is this a “good buy” for the investor? As always, the answer is interest earnings. As the property owner pays off the past-due debt, he must also pay a penalty in the form of interest. That interest can range from ten to fifty percent. That means a tremendous profit for the bondholder. Even if the property owner does not pay, in most cases, after a set period of time, the lien holder can foreclose on the home and set up a sale. Purchased at the right price, this too can represent a tremendous income for the investor.

The fall:

At this point, the market for fiscal bonds suffers a major drawback. That is the lack of a secondary market or uniform process for reselling pending links. For now, liens are sold only once and the buyer assumes the responsibility of collecting the past-due debt or continuing with the foreclosure process. However, if a secondary market were to develop, it could become a real source of investment and more would consider it a type of hedge fund. They could, if done correctly, buy low and sell high and reap the rewards more quickly without having to worry about the hassle of collecting due taxes.

This is not to say that they do not offer a high-yield opportunity as is, but that they are currently not ideal for hedge fund type investments.

Risk versus reward:

Regardless of whether or not they function as a hedge fund at the moment, tax lien investors speak highly of this type of investment. An investor in this market can expect an average gain of around ten percent on outlay and the average bond purchase will see a fifty percent payback in the first year. Not risk free, as there is no set maturity date and foreclosure can be a lengthy undertaking, they are still considered a favorable source of investment for many seeking lower risk and moderate returns.

Who should make the investment?

Notwithstanding the above, included in the list of those who typically seek these types of investments, such as corporations and regional tax groups, are hedge funds and private equity firms. They are ideal for those who are not looking for easy liquidity and for those who have the adequate support of an expert legal team.