by Frank Sherosky

Created on: January 14, 2009   Last Updated: June 08, 2011

I remember making 15% on my Michigan tax lien investments as far back as the 1990s in my self-directed IRA, while others were only making 7% on their CDs. I declare it was and still is a valid, safe investment. In fact, there are two ways to invest in tax liens, depending on the state: certificates and outright properties.

Which type you choose depends on your tolerance for involvement. Certificates are passive, while properties are active. The passive certificates are less work; meaning, all you have to do is pay the back taxes and get a certificate that is redeemable one year from issuance. The properties are more work; meaning, you physically take over the property and all the headaches therein; including the "3 Ts:" tenants, toilets and turnovers.

Tax Liens Provide Opportunity to Diversify:

As investor and manager of your wealth, your choices of investments are many. Sure, you can attempt to pick an individual stock; or you can buy a mutual fund or an ETF, and play an entire segment of which your stock selections reside. Yet, how many fail to really diversify and look at investments right in their home town? Unlike a stock market purchase, when you purchase a tax lien certificate you don't need to worry about sudden changes in the market.

Many do not realize that they can invest in tax liens with their IRAs. I did for years when I had an account with E.D. Jones. The key is having a self-directed IRA custodian like Jones that will allow you to invest in almost any prudent investment including real estate, notes and options. It is not always the IRA contribution that builds wealth, but how you invest it. Properly invested, even small amounts can grow considerably.

This means you have the freedom to diversify into tax liens as tax-deferred, investment vehicles. And, by the way, your TD-Ameritrade, Etrade and Schwabb accounts do not qualify. You need a custodian.

As you can see, it can be much smarter to play the tax-lien segment than individual stocks, especially when the real estate stocks are going bust. The idea here is to think housing with low risk. When a property owner, for example, does not pay his local taxes on their homestead, the local government has the legal right to put a lien on it. This tax lien takes precedence over mechanics liens.

Now, the local government doesn't need or want these properties. They want the tax revenue these properties bring in. That's where you come in. An investor can purchase the right to gain a great return or own

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