When homeowners fall behind on property tax payments, the local governing authority may place a lien on the property. This lien guarantees payment of taxes if the property is sold.

The governing authority may issue tax lien certificates, which you can purchase to invest your small-business profits. These certificates pay investors interest and provide the governing authority with the money it expected from the tax payments.

When you purchase a tax lien certificate, you do not receive interest payments. Although interest charges get added to the tax bill, these are not paid until the homeowner pays off the tax lien. At that point you get your full investment plus interest, but you have no income until the homeowner redeems the tax lien certificate.

You must research the status of a tax lien certificate in the event of foreclosure.

If the home is sold to pay off outstanding debt, you many not get your money back if other creditors have claims that take priority over yours. This happens when the Internal Revenue Service has first claim to the home and when a lender has the second claim to proceeds from the home.

Check to see if there are any other liens against the home. If the home is sold at auction, your certificates may never get redeemed if you are not first in line to be paid. Once you buy a tax lien, your money is tied up. The homeowner must pay off the tax lien, and you cannot predict how long that will take.

Though you could offer the tax lien certificate for sale, you may not find a buyer, or you may have to sacrifice your interest in order to get your principal back. You must make sure the property has value.

If you buy a tax lien on a property that no one wants, the taxes may never be paid and your certificates will be worthless.

In addition, homes that are worth less than the homeowner owes may be abandoned. You must research the home to make sure that it has enough value to attract a buyer who can redeem your tax certificates. Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business.

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Investing in Property Tax Liens | Investopedia

Cash Flow Disadvantages When you purchase a tax lien certificate, you do not receive interest payments. Foreclosure Risks You must research the status of a tax lien certificate in the event of foreclosure. Lack of Liquidity Once you buy a tax lien, your money is tied up. Worthless Property You must make sure the property has value. Tax Lien Investing Tips and Risks LandForPennies. Tax Lien Investing; Are There Any Disadvantages?

Investing in Property Tax Liens | Investopedia

Invest In Tax Lien Certificates SFGate. Pros and Cons of Investing in Tax Lien Properties TaxLienInvestingNews. What Are The Disadvantages In Investing In Tax Lien Certificates?

About the Author Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. Suggest an Article Correction.

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