How to Earn 15%+ in a 6% World

Interest rate yields are up from last year–slightly. Last week Friday, August 8, 1997, Three-Month Treasury Bills were yielding 5.14%. One year ago, the yield was 5.00%. Six-Month Treasury Bills were yielding 5.21%; one year ago, 5.11%. Stretching it out, Ten-Year Treasury Notes were 6.24; last year they were actually slightly higher at 6.54.

As investors, all of us should be asking: “Can’t I do any better?” Several years ago, Money magazine published a lead article which made a big impression on me. That article answered the question with a resounding “Yes!”

In that April 1994 article entitled “How to Earn 15% On Your Investments,” the magazine answered the question with a chart entitled “These 12 Stocks and Funds Can Earn 15% or More.” This chart broke down these twelve stock and mutual funds into to four categories: total return, growth, international, and special strategies.

Under “Total Return,” three stocks and one fund were listed. The first stock listed was McGraw Hill – stating that the stock was “recently traded on the New York Stock Exchange at $70.50.” The magazine quoted an analyst as predicting that “the stock will rise as high as $80 by April 1995 for a total return – including dividend – of nearly 17%.” 17%! Not bad!

Unfortunately, when I checked on January 5, 1995, the day’s final trading price for the stock was 66 5/8. If you had bought this stock at Money’s recommendation, that day you wouldn’t have been looking at a 17% total return. You’d have been looking at a loss in your principal!

The one mutual fund listed under the top “Total Return” investments was the Oppenheimer Main Street Income & Growth fund. Money stated that the fund could “be a good bet to jump the 15% hurdle.”

Unfortunately, a call to Oppenheimer on January 6, 1995 revealed that the 1994 “return at net asset value” (based on change in share price and including all distributions being reinvested) was then a negative 1.53%! Another loss of principal.

The point: When Money magazine stated that “These 12 Stocks and Funds Can Earn 15% or More,” it should have stated that “These 12 Stocks and Funds Might Earn 15% or More – or they might earn a negative return. Buy – and then find out!” That word “might” has a very speculative ring about it.

Fortunately, knowledgeable real estate paper investors can fairly easily obtain yields that are as high as – even higher than – the potential “Can Earn’s” listed by Money, and these yields are extremely well-secured and non-speculative. Starting right now, you can get yields as high – or HIGHER – than 15%. And, if you buy prudently, those yields are almost guaranteed!

Investing in tax lien certificates

How? By Investing In Tax Lien Certificates. What exactly are tax lien certificates and tax lien certificate sales? In some 32 states, conducting tax lien certificate sales and issuing tax lien certificates is the method by which local government collects its delinquent real property taxes.

For instance, if an owner of real estate doesn’t pay his real property taxes (together with any interest, penalties and charges currently due), then the county treasurer will sell the right to collect those sums to investors at a public oral bid auction sale, a tax lien (or tax certificate) sale.

The property is not sold; only the right to collect the delinquent taxes is sold. That right, evidenced by a document termed a tax certificate (or tax lien certificate), is secured by the so-called real property tax lien. Hence the term “tax lien sale.”

The best of both worlds–high yield AND security

Why invest in tax lien certificates? Yield and security. Paper investors can obtain extra-ordinarily high yields. For instance, investors buying Iowa tax certificates and those issued by the City of Baltimore, Maryland get annualized yields of 24%. Investors buying in Garrett County or Prince George’s County, Maryland get yields of 20%.

Those investing in Florida, Illinois, New Jersey, New Hampshire, and Anne Arundel and Howard Counties in Maryland can get yields as high as 18% – in some cases higher. In Arizona, investors can get yields as high as 16%. Investors in Colorado, Indiana, Louisiana, Massachusetts, Michigan, Mississippi, Wyoming can often obtain yields equal to, or greater than, 15%. Nebraska certificates yield 14%.

Investors buying the Texas and Georgia counterpart to certificates (i.e. deeds with a right of redemption) get annualized yields of 20% or more. For instance, in Texas if an investor buys any property other than a homesteaded or agricultural use property then, upon redemption, the annualized yields will be 50% or more!

As you can see, these tax lien certificates and deeds with right of redemption “Can Earn” the “15% or More” yields which were advertised in the Money magazine article; however, there’s another extremely important additional benefit which you don’t receive investing in the Money magazine recommendations: Extra-ordinary Security.

Very low loan-to-value ratios = very high security

While the yields obtained from tax lien certificates is not federally insured like Treasury Bills and Notes, a knowledgeable investor, exercising a little caution, can make these yields nearly as secure!

How would you like to invest in first trust deeds or mortgages secured by prime real estate with loan-to-value ratios of under 10%? With equity cushions of 90% or more? That’s the kind of security you can get when you invest in certificates!

Each tax lien certificate is secured by the local government real property tax lien against a specific parcel of real property. And you get to choose the property – so you can make that property prime real estate. Plus, the tax lien is a so-called “priority” lien.

Generally speaking, the tax lien is senior to all private party deeds of trust and mortgages, state and federal tax liens, judgments liens, mechanics liens, etc. Consequently, with just a little bit of caution, your high yield will be secured by THE first lien against the prime real estate you selected.

And since that first lien secures only what you paid for the tax lien certificate (basically just delinquent real property taxes and penalties not paid by the property owner), and since those taxes and penalties can be as little as just 1% of the fair market value of the property which is security, you’re talking about extraordinarily low loan-to-value ratios.

Or as one commentator stated: “(E)very dollar of your investment (can be) secured by as much as $100 in (prime) real estate.” That would produce a 1% loan-to-value ratio! Now that’s HIGH security – and low, low risk!

An incredible investment opportunity

By comparison, remember that banks and thrifts invest in real estate paper. They originate trust deeds and mortgages and are currently investing their funds in 30-year fixed interest rate loans providing them with Annual Percentage Rate (APR) yields of from 7.3 to 7.8% with loan-to-value ratios of 80 to 95%!

Investing in tax lien certificates, you could get returns that are twice as high – and higher – with loan-to-value ratios of less than 10%. An incredible investment opportunity!


By CREOnline Contributor

A content contributor to the original