Today’s investors face the toughest economy in decades and, as a result, low hedge fund returns. So how are yesterday’s returns supposed to be obtained in today’s economy? What will be the next big source of investment income? These are the questions that the best professionals ask themselves. However, the answer may be right under your nose.

For one hundred and fifty years, the counties and municipalities of this country have been in the business of selling tax bonds, which provide high returns for interested and knowledgeable investors. This type of investment fits very well with multi-strategy hedge funds, as well as those focused on the credit and real estate market.

Understanding the process:

However, before investors can dive into this slightly unique market, they must understand the concepts behind it. One of them is the tax receivable lien, which is simply the right to collect taxes on a property. The reason this term is so important to this market is because once a homeowner falls behind on property taxes, after some time, the bank has the right to place a lien on the property. and sell that lien. The buyer can then collect back taxes from the property owner.

Because much of a government’s ability to allocate funds depends on the collection of property taxes, failure to pay by individuals is highly detrimental. Therefore, governments must seek quick solutions to alleviate the loss of income. Otherwise, they must cut their spending or raise property taxes for those who continually meet their obligations. Therefore, it is not surprising that many governments seize the opportunity to sell the debt, which carries a security of the property itself.

So why is this “a good buy” for the investor? As always, the answer is interest earnings. As the landlord pays the past due debt, he must also pay a penalty in the form of interest. That interest can range from ten to fifty percent. That means a big win for the link holder. Even if the property owner does not pay, in most cases, after a set time, the lien holder can foreclose on the home and arrange a sale. Purchased at the right price, this can also represent huge income for the investor.

The fall:

At this point, the tax liens market suffers a major drawback. That’s the lack of a secondary market or uniform process for outstanding link reselling. For now, the links are sold only once and the buyer assumes the responsibility of collecting the debt owed or continuing with the foreclosure process. However, if a secondary market were to develop, it could become a real source of investment and would be viewed by many more as a type of hedge fund. They could, if done correctly, buy low and sell high and reap the rewards more quickly without having to worry about the hassle of collecting taxes owed.

This is not to say that they do not offer a high return opportunity as is, but it does mean that they are currently not ideal for hedge fund investments.

Risk versus reward:

Regardless of whether or not they function as a hedge fund at the moment, investors in tax liens speak highly of this type of investment. One who invests in this market can expect an average profit of around ten percent on payout and the average link purchase will see a fifty percent payback in the first year. They are not risk free as there is no set expiration date and foreclosure can be a long undertaking, these are still considered a favorable investment source for many looking for lower risk and moderate returns.

Who should make the investment?

Despite the above, on the list of those who normally seek this type of investment, such as corporations and regional lien groups, are hedge funds and private equity firms. They are ideal for those who are not looking for easy liquidity and for those who are properly supported by a trained legal team.