One of the most common misconceptions about tax lien certificate investing is that it provides “passive income.” While the security and high fixed returns of tax lien certificates are indeed attractive, it’s critical to understand that this investment strategy does not operate like traditional passive income sources such as rental real estate or dividend stocks.

No Regular Monthly Income

Unlike rental properties, which generate predictable monthly cash flow, tax lien certificates do not pay on a monthly schedule. The return on your investment (whether 8%, 18%, or even 24%) is paid only when the property owner repays their delinquent property taxes.

This repayment can happen at any point during the state-mandated redemption period, which ranges from 6 months to 3 years, depending on the state.

Payment Depends on Redemption Timing

Your payment schedule is not in your control; It depends entirely on when the property owner decides to pay their delinquent tax bill.

That means you could earn a substantial return, but you’ll need to wait.

This structure means your capital is tied up during the redemption period. Unlike a CD or bond, which offers regular interest payments, there’s no recurring income stream until redemption occurs and you receive your money back, plus interest, in one lump sum.

How Do You Get Paid?

Initially, when you, an investor, purchase a tax lien certificate, you’re essentially paying the county the delinquent property taxes owed by the homeowner. Later, once the homeowner repays the taxes (redeems the lien), the county collects the payment and then disburses it to you, the investor.

This payment includes:

- Your original investment (the amount of the lien)

- Interest earned (based on the rate set by state law)

It’s important to note: you don’t get paid until the property owner redeems the lien. That redemption could take weeks, months, or even years, depending on the length of the state-mandated redemption period.

Your payment schedule all depends on when the homeowner repays.