How to Start a Self Directed IRA Using Tax Lien Investing with Little Money Upfront

How to Start a Self Directed IRA Using Tax Lien Investing with Little Money Upfront

Have you been considering real estate or tax lien investing in your Individual Retirement Account? It's not uncommon when people are surprised to find out that real estate is permissible by the IRS in your retirement plan. A truly self directed IRA allows you to make decisions in investments that you know about, including real estate and tax liens.

Maybe you don't have six figures to invest (or for that matter five or four figures). We've all heard stories about people that have made considerable sums of money off of real estate investing. But where do you get the money to get started?

If you don't have an angel investor or a partner to purchase property with, tax lien investing is an option. When you first open your SDIRA, it may be difficult to gain a large amount of capital to get the IRA started; however, tax lien investing can be started with as little as $3,000 or less. It all depends on the lien that is put on the house by the county government.

How to Get Started with a Real Estate IRA

In today's economy, short sales and foreclosures are common. In fact, the government has issued a moratorium on foreclosures in many states. If you don't have the capital to buy the whole house, another option to look into would be the tax lien. Oftentimes, if the bills aren't being paid, the taxes aren't either.

A tax lien receives priority over any other type of lien when the house is sold; however, the house doesn't have to be sold to collect the money. The property owner may decide to pay at any time plus interest owed.

How Tax Liens Work

The county government usually evaluates and charges property tax on all properties within their region. This includes raw land and commercial property. The assessment is usually sent out twice a year in April and October. In some cases, the mortgage includes an escrow account for the property taxes, but not always. When the individual fails to pay the tax bill individually or through default of the mortgage, the government will put the lien up for sale at a county auction.

Whoever buys the lien will be able to charge the interest rate in addition to the tax lien. That way, the government doesn't have to hassle with collecting the taxes, the investor makes a profit, and the taxes are paid upon sale of the property. Typically, the government has no interest in collecting the interest on the bill, so they sell the lien. The investor then makes the profit off the interest.

If you are working with a limited income, research the property taxes in different areas and see if there are any tax liens available for investment. Once you find one within your budget, the sale of the house will be dependent on any liens being paid first. Also, if the house is refinanced, the homeowner will be required to pay any liens first.

Of course, there are other ways than tax lien investing to start a self directed IRA. If you are looking for a way to invest a smaller sum of money in a self directed IRA, find a passive custodian that allows a large range of investment options.

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