The end of 2022 saw a perfect storm of factors hit the real estate market hard. Rising inflation and interest rates along with falling property values have destabilized the market and scared off thousands of potential investors. But that perfect storm of factors is exactly what the savviest real estate investors use to their advantage. Status quo investors stand to lose a lot of money if they wait for market volatility to stabilize.
Proactive investors are leveraging the market’s own volatility to make 2023 their most lucrative year using government-backed notes (GBNs). Investing in GBNs is a strategy that could lower your risk and raise your passive income potential – and it’s a lot easier than you think.
How GBNs Work
GBNs, also called tax lien certificates, are placed on a property by the government when the owner becomes delinquent on property taxes. GBNs are usually sold to investors at auction, and, once sold, the buyer becomes the official property owner. There’s no contact with renters or buyers, making it a form of real estate investing that’s particularly attractive to those looking for a truly passive income stream.
GBNs are administered by specific municipalities. Most states and counties set their own property tax rates, as well as their own fixed rates of return. These fixed return rates are also backed by the real estate value of the property under lien.
County default rates during an economic downturn can reach more than 30%. Contrast that number with default rates that generally range between 10% and 20% when the economy is stable. That means today’s depressed economy and volatile real estate market could lead to a flood of GBNs going up for auction sooner rather than later. As inventory goes up, competition goes down, providing investors with their pick of properties.
Large corporations have historically been the biggest investors in GBNs, especially during times of economic downturn. However, individual investors can use the same process to purchase GBNs, too.
Why GBNs Are a Good Investment
What we’re seeing today is no ordinary economy. The S&P 500 finished 2022 down nearly 20% and things haven’t turned around so far. Anyone with a traditional financial portfolio of 60% stocks and 40% bonds saw their hard-earned investment dollars freefall right along with the stock market.
Investing in alternative assets like GBNs is a wise move. Diversify ing your 60/40 portfolio by intentionally moving away from traditional stocks and bonds could help protect you and your loved ones from another inevitable economic downturn and the recession that’s almost certainly coming.
GBNs can offer a higher rate of return than stocks and bonds, giving you a consistent and reliable stream of passive income. GBNs allow investors to collect unpaid taxes plus interest, which can range from 8% to over 30% depending on the jurisdiction.
Some GBNs also have a low point of entry, letting individual investors acquire high-value properties for pennies on the dollar.
But remember: Like with all investments, it’s important to do your homework. Before you take the plunge into GBN investing, find out as much as you can about the property, the neighborhood, and the associated tax rates. It’s never a good idea to invest in a property with no upside, no matter how low the entry point.
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