Tax Lien Investments for Income

tax lien investing for incomeA couple of years ago someone I knew from work who was a fairly senior manager with the federal government was able to retire at a much younger age than was typical.  When I inquired as to how he was able to manage this, he said that he had been able to build up his income from part-time tax lien investing to make early retirement a real option for him.

If you are an investor looking for safe income investments, but wanting or needing higher returns than you can get from putting your money into bank CDs, one option to consider is investing in Tax Liens. If done properly, investing in Tax Lien certificates will enable you to realize safe, higher annualized returns than from typical debt investments.

The collection of real estate property taxes is a major priority in every taxing jurisdiction in the United States, as all homeowners know all too well.  If a county or municipality were unable to collect those taxes in a timely fashion, it would be unable to provide the public with important public safety services (police and fire departments) or public schools.  To avoid this problem, all counties in 26 states across the US will place a Tax Lien on any property with delinquent property taxes and then sells the delinquent tax debt to investors.  The county gets their money, the tax delinquent taxpayer gets more time to pay their already past due property taxes, and the investor gets a real estate-secured high yielding investment.

Safer with Higher Returns

A couple reasons that some income investors like to hold government issued Tax Lien certificates as part of their income portfolios are:

1. Rising and falling interest rates do not directly affect Tax Lien certificate rates because the maximum interest rates for Tax Lien certificates are mandated by state law, and actual rates of return are usually determined based on local auction results.

2. Rising and falling stock market prices also do not directly affect the rate of return. Each state has a mandated length of time for the delinquent taxes to be paid.  If they are not made current during this time period, the property is sold to pay the debt.

For most properties that have an outstanding mortgage, the mortgage lender will pay these delinquent taxes before it gets to the foreclosure stage.  The certificates can also be sold or transferred at a discount before the due date allowing the investor to make a smaller profit on the certificate should there be a need for cash prior to certificate redemption.

To illustrate the variability of laws from state to state, the following are examples of maximum interest rates and redemption periods for Tax Lien certificates in three states:

Arizona:  16%, 3 years
Florida:   18%, 2 years
Indiana:  15%, 1 year

The Pros and Cons of Tax Liens

The following video from the real estate investor Phil Pustejovsky is a good summary of the Pro’s and Con’s for investing in Tax Lien certificates.  Phil prefers to pursue opportunities with tax deeds versus tax liens because of the higher return on investment, but I suspect readers of this blog may be more attracted to the hands off aspect of tax lien investing.

 

 

As Phil points out, self-education and due diligence are prerequisites for ensuring these become smart investments for income.  If you do think you might want to study up on this type of investment, one good choice would be to try the tax lien investing course by Steven Waters. You can find out more about it by clicking here. ==> Tax Lien Investing

 

 

 

Are Annuities Smart Income Investments?

Annuity Income InvestmentsI’ve been meaning to post something on annuities for a while now since some people like to include them in their income portfolio to receive a regular payout.  If you get an “immediate” annuity, the payments can begin quickly; otherwise, you have to wait a certain number of years to start receiving your regular income.  The simplicity of the concept is appealing; however, as they are insurance products, annuities are often shunned by many individual investors because of the high fees and commissions that are typically associated with them.  You are also basically relying on the promises of an insurance company to make your payments.  Investors willing to do a little work on their own can set up their investments to provide equivalent or better returns with, perhaps, less risk.  The following video shows how it can be a fairly simple thing to do (the video is followed by a commercial and some other news items, so stop it after viewing unless you want it to go on – sorry, but I don’t think WSJ will just let me embed a single video):

 

 

I think the video does a good job in showing why buying a “deferred” type annuity is a bit silly.  I personally think an immediate annuity can still be a valid option and make a lot of sense for people depending on their circumstances.  Regardless of how enthusiastic we currently are in managing our investments and portfolios, there will surely come a time in our futures when we will no longer have the capability or motivation to do so.  When that time comes, an immediate annuity for income can be a smart investment.  Getting some random quotes on immediateannuites.com, I’m currently seeing yields of between 5% and 6%, but as interest rates rise in the future, these yields can be expected to rise as well.

 

 

Royalties for Income

royalty investments for incomeRoyalty investments, previously a domain only open to wealthier income investors, are becoming increasingly more accessible to ordinary investors.  Internet technology combined with more efficient financial markets has produced a win-win environment for the buying and selling of royalties.

Music Royalties

If you are attuned to popular culture, one of the more interesting possibilities for investing in royalties exists with the music industry.  Check out this article by Jasmine Birtles:

Make money by investing in royalties …

Oil and Gas Royalties

Oil and gas royalty trusts have traded on the stock exchanges for years.  One may, however, avoid the wall street commissions and overhead expenses that eat into an income stream by bypassing the royalty trusts altogether and purchasing royalty shares directly from producers and owners of oil and gas interests.  Royalty income obtained in this manner will invariably provide a higher yield (although less diversification may increase risk).  This is one area where you need to thoroughly understand what you are getting into before investing.  Due diligence and legal reviews are always a good idea.  One good site to find possible investments is ListMineralRights.com.  View the ads for Royalties for Sale.

Other Areas Not Quite Ready

Other industries where royalties are emerging as viable investment income streams are the pharmaceutical industry and the gold and silver mining industry.  Some pharmaceutical companies sell royalties for drugs they produce.  Unfortunately for the individual investor, most of these are purchased by large investors (Royalty Pharma, Cowen Healthcare, Paul Capital, DRI Capital) and other pharmaceuticals.  In precious metals mining, the gold and silver royalty “streamers” can be thought of as mining companies without the risks associated with the mining business (i.e., increasing operating expenses, union interference, litigation, environmental regulations, capital expenditures, and availability of capital or credit).  Their primary risk is the price of the underlying metal and, of course, macroeconomic factors like rising interest rates.  Gold royalty streamers include Franco-Nevada (FNV), Royal Gold (RGLD), and Sandstorm Gold (SAND).  A silver royalty streamer is Silver Wheaton (SLW).  These streamers have not significantly outperformed the GLD and SLV ETFs over the past year, so I cannot recommend them as smart investments for income at this time.  However, should economic and market conditions change, they may be worth considering.

 

 

 

Update: Income from Gold and Silver

investment income from precious metalsHere’s an update to the post I wrote last August on Income from Precious Metal Investments. In that post I mentioned that one possible strategy for deriving income from gold and silver was to write covered calls against investments in GLD and SLV. Well, it looks like someone else was thinking the same thing.

Since October 2012, gold and silver prices have gotten hammered (I wonder what Ron Paul’s portfolio looks like now!).  During this negative environment for precious metals, Credit Suisse launched a couple of exchange-traded notes (ETNs) that employ a covered call strategy to provide an income yield for underlying gold and silver holdings. GLDI was launched in January with a strategy to sell covered calls against GLD, and SLVO was launched in April to do the same for SLV. Although performance of these ETNs has been less than stellar so far, these products are still new and probably worth watching as possible investments for income.

My personal view is that these products are still unproven, and their risks should be considered carefully by potential investors. In addition to the concern I mentioned in the previous post about GLD and SLV being able to accurately reflect the price changes for the metals in all market conditions, there is also the uncertainty of Credit Suisse being able to back up the ETNs in all market conditions. I’m also a little concerned that the timing of these product launches may not be the best. Covered call strategies that involve selling and then buying back out-of-the-money calls from month to month are usually optimal when the prices for the underlying securities are flat or slightly bearish. In times when prices are rising significantly, the strategy gets tricky. Simply owning the underlying securities and foregoing the call income would usually maximize overall returns in a bullish situation, but of course then you would receive no income.

Over the past month (May 2013), we’ve seen long-term interest rates starting to creep up. If this turns out to be a precursor to the long-awaited inflationary cycle, then a covered call strategy for precious metals may not be the best strategy to pursue right now since gold and silver prices would also be expected to rise substantially. If, on the other hand, you believe that prices for gold and silver will remain relatively flat for some time, then these ETNs may prove to be smart investments for your income portfolio.

Income From Precious Metal Investments

gold silver investment incomeIn response to popular economic forecasts, many people are considering making investments in hard assets. A couple of weeks ago, PIMCO’s Bill Gross tweeted the following message to his followers:

Gross: w/ neg real intrest rates out to 20 yrs in US bond mkt, how wl investrs maintain purchasing powr? Stocks maybe. Real assets bettr bet

Real assets do sound good to me, but the question for income investors is whether or not there are viable ways to produce reliable income from real assets. Generating income from real estate and property investments is straightforward enough since they lend themselves to rental arrangements. But what about generating income from precious metal holdings?

Gold and silver holdings are often considered dead weight in a portfolio. They provide a good hedge against currency devaluation and inflation, but they do not produce income, and their financial benefits are not realized until after the hard assets themselves are actually sold. The next best thing to owning the physical metals would be to own securities that are closely linked to the value of precious metals. Even better would be to generate income from such securities. Be aware that various hair-brained schemes (and scams) to produce income from precious metal holdings have been attempted in the past (see here for example), but these have always ended with great disappointment and tears for investors. If you are interested in trying to squeeze some income from precious metal investments, consider these two more conventional ways of doing it.

Buy Gold and Silver Mining Stocks that Pay Dividends

As experienced investors will tell you, the price of a mining company’s stock is somewhat correlated to the price of the underlying metals that the company extracts, but the link is far from perfect. My own unscientific observation is that the share prices of mining companies are much more volatile than the prices of the metals themselves. Although the prices do not move completely in step with each other, shares of gold and silver mining companies should fare well during any period of inflation. A list of dividend-paying gold and silver mining companies can be found at this site.

Write Covered Calls Against GLD or SLV

The Gold (GLD) and Silver (SLV) ETFs track the price movements of their respective metals. Although bullion purists are skeptical about the ability of the ETF price-tracking mechanisms to continue to operate properly under extreme conditions, to date these ETFs appear to be working just fine. Both ETFs are optionable, and based on the open interest volumes and the relatively narrow bid-ask spreads, the markets for their options appear to be comfortably liquid for traders. If you have the required resources, and a conservative options income strategy appeals to you, you can generate monthly or weekly income by selling covered calls against these ETFs. I don’t consider this to be passive income since it does take some work, but it is better than no income at all. As with all options investing, do your homework and make sure market conditions are favorable for your strategy before acting.

Since generating income from real assets is a topic of increasing interest, I hope to update this post in the future as I discover other possible approaches that pass my “sensible and workable” criteria.

Alternative Real Estate Investments for Income

real estate investingSo you’ve designed an income portfolio containing a healthy mix of equity and debt instruments tailored to your personal situation and taking into account the current economic climate. Congratulations!

But wait – something is still bothering you.

After some thought you realize that all of the investments in your portfolio depend on the performance of the financial markets. Based on recent past experience you recall how these markets were actually quite correlated in their response to the financial shocks that hit a few years ago. Isn’t there a way to diversify a bit more and invest in income producing assets that are not so dependent on the financial markets? The answer is a resounding………maybe.

On the face of it, the price of real tangible assets like real estate and commodities would appear to be uncorrelated with stock valuations or interest rate fluctuations. However, common inter-market forces (e.g., significant changes to the value of the dollar), can affect both financial markets and the price of real assets at the same time. Assuming you find this bit of correlation acceptable, then real estate does present some possible income investments to explore.

Of course the most common real estate investment is to buy residential rental property (preferably at a deep discount) and generate income from the rent. The internet is full of resources to assist you in finding suitable properties. Here I want to mention some other types of real estate investments for income.

Agricultural Properties

Agricultural properties include farms that generate income. You can own and operate the farm for income yourself, or you can purchase property and just lease it to a farmer for the rental income. Good basic information on agricultural investments can be found here and here.

Forestry Assets

Forestry assets include timberland that provides raw materials for paper products, construction, and fuel. The primary driver for forestry investments is the fact that timber grows in physical size, giving owners exposure to financial growth that is independent of financial markets. In addition to income from timber sales, forest owners can derive additional income from hunting leases. Helpful information to jump start your research for these investments is located in Chapter 2 of this Forest Landowners’ Guide.  Forestry assets tend to be longer-term investments, but once established, the income is fairly secure.

Rural Land

Selective investing in rural land might also have potential income possibilities although much research is needed to make this kind of investment pan out. The most common way in the U.S. to derive income from raw land is to own property with a high probability of oil or natural gas reserves underneath, and to then lease the land to drillers. Another way to generate income is to buy rural land that has commercial potential (location, location, location!) and lease it. The website LandsofAmerica.com is a good resource for finding land properties.

Like every other investment class, these all come with their own sets of risks and rewards, so research is absolutely required, but a careful investor can be successful in diversifying an income portfolio by adding alternative real estate investments for income.