There are various options if you want to invest in real estate, but many involve significant upfront costs. Tax lien investing can be a good option for those who want an accessible way to start investing in real estate.

When a homeowner or landowner fails to pay taxes on a property, the government will place a lien on the asset. A lien is a legal claim against the property for the amount owed in property taxes. The municipality that issues the lien, such as the city or county, can seek to collect the unpaid taxes or sell the tax lien in an auction.

In an auction, investors can purchase the tax lien certificate, which shows the total amount owed in taxes plus interest and fees. If you choose to participate in the auction, you can bid on the tax lien certificate. Typically, investors bid in one of two ways:

Highest premium: In this type of auction, investors will bid above the amount of the tax lien. The investor who bids the highest premium wins the tax lien certificate.

Lowest interest rate: This method allows investors to bid on the interest rate they will pay on the lien. The investor who bids the lowest rate will receive the tax lien certificate.

If you win a bid for a tax lien certificate, you're responsible for paying the unpaid taxes, including any interest and penalties. However, you can make money on your investment by collecting interest from the property owner, who will repay you for the debt. If the property owner is unable to pay their debts, you can initiate the foreclosure process, allowing you to gain ownership of the property.

Tax lien investing has the potential to be profitable, but it also comes with risks. It's important to do your research so you're familiar with the property and the owner's ability to repay the lien. Consider working with a real estate agent or financial adviser if you're interested in diversifying your portfolio with tax lien investing.

Turbotax.com, Investopedia.com, Bankrate.com