The adage goes that you cannot have high rates of return and great safety. 95% of individual investors accept that as fact, as unbreakable law.

How’s that working out for them?

The high safety of Money Market Funds, CDs and bank interest produces little to no actual net returns.  According to Bankrate.com as of May 17, 2010, yields on fixed investments range from .74% to 1.04%.

Tax lien investing offers high rates of return and great safety.  According to accepted wisdom that’s a paradox.  Tax lien investing has three paradoxes:

Paradox 1—Rates of return are NOT tied to other indicators

Fixed investments can be volatile when they’re auctioned on financial markets or tied to indicators like the Federal Funds rate.  Tax lien rates are set by the state government they are purchased from.  The state/county government wants the money and sets a premium paid to those who would invest in the tax liens.  Straight cash not tied to any other financial or economic indicators, and no voodoo for market timing.

Paradox 2—Secured to a RELIABE asset

How would you feel if the fixed investments in your portfolio are backed by the full faith and promise of the government of Greece?  How about any of the other nations referred to as the PIGS (Portugal, Italy/Ireland, Greece and Spain)?  What about the current bond yield of the US Government?  Safer but the old rule again:  safety equals low yield.  Tax liens are secured by real estate that people occupy and want to keep.  When given a payment plan that includes a rate of interest that’s acceptable, they pay.  If not you get the asset before any else can lay claim to it.

Paradox #3—Direct investment in the asset NO middleman

How many times has your stock, bond, or commodities broker offered you tax liens as an investment.  None!  Tax liens are a solo investment, no middleman in a tool booth position to profit from the transactions.  Broker fees add up reducing the amount you invest and affecting returns.  You may hire a proxy to purchase tax liens for you, but that’s not a costly requirement.  More money invested means more return in your pocket.

High yield and safe tax lien investing isn’t an option to 95% of the population looking for safe returns.  That doesn’t mean the other 95% is ignorant of tax lien investing.

Next week we’ll take a look at the Jekyll and Hyde nature of the two groups interested in tax lien investing.