Tax Lien Investing in New Jersey - Calculating How Much Premium You Can Pay
In order to calculate how much premium you can pay for a tax lien, you first have to know what your bottom line is. In other words, what is the lowest return that you are willing to accept on your investment? Then you can calculate just how much premium you can pay and still make the profit that you want. I use Tax Lien Manager, a software program for New Jersey tax lien investing created by DataVentures I LLC to do this for me. Tax Lien Manager computes premium for a 4%, 5% and 6% return based on the assumption that the lien will be held for a minimum of one year and that you will pay all subsequent taxes when they are due. Heres how you can calculate how much premium you can pay if you dont have software that does this for you like Tax Lien Manager.
Once you know the return that you want, you then have to know how many tax quarters are open at the time of the sale and what the annual taxes are. Lets assume that you are going to a tax lien sale in August and that the municipality is on a calendar year. As of August 10th, you will be able to pay 3 quarters of open (subsequent) taxes on any tax liens that you buy.
When you pay premium for a tax lien certificate, your profit consists of the redemption penalty + the interest on your subsequent tax payments. Your total investment is the certificate amount + premium + subsequent taxes paid. Your total return on your money is total profit divided by your total investment:
Redemption Penalty + Interest on Subsequent Taxes _______________________________________________
Certificate Amount + Premium + Subsequent Taxes Paid
For this example, lets assume that the certificate amount is $2000.00 and the annual taxes are $4000.00. The redemption penalty is $2000.00 x 2% or $40.00. Since its after Aug 10th and you can pay 3 quarters of open (subsequent) taxes, interest on the subsequent taxes is 18% x $3000.00 or $540.00. Your total profit is $40.00 + $540.00 or $580.00. Your total investment without the premium is the Certificate Amount + Subsequent Taxes Paid or $2000.00 + $3000.00 = $5000.00. Calculate premium with a 5% return on your money as follows:
$40 + $540 / ($2000 + $3000 + X) = 5%, where X=premium.
$580 / ($5000 + X) = .05
Multiplying both side of the equation by (5000 + X), you get:
580 = .05 (5000 + X)
580 = 250 + .05X
Subtracting both sides of the equation, you get:
330 = .05X
Dividing both sides of the equation by .05, you get:
X = 6600, or premium = $6600.00.
This is a simplified equation and does not take into account interest on future subsequent payments. If the lien is held for one year and you keep paying the subs, your actual return will be higher. If you are using Tax Lien Manager, you will get a more accurate result based on paying one year of subsequent taxes.
Joanne Musa works with investors who want to reap the rewards of tax lien and tax deed investing. She is the author of the Tax Lien Ladys E-books, Tax Lien Investing Secrets and Tax Lien Ladys State Guide to Tax Lien and Tax Deed Investing. For more about tax lien investing e-mail MoreTips@taxlienconsulting.com To find out more about Tax Lien Manager, go to http://www.njtaxliensoftware.com/
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