Last Updated on August 31, 2025
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Cory from our team recently made a short video to explain a key part of tax lien investing. Many new investors get confused when they see the terms interest rate and penalty rate in county records. This article summarises his talk in plain English and adds examples and links to help you learn more.
What do “penalty rate” and “interest rate” mean?
In a tax lien or deed sale, the investor pays the delinquent taxes on a property. In return, the property owner must pay back the taxes plus an extra amount if they want to keep their property. There are two ways states handle this extra amount:
- Penalty rate – The property owner must pay a fixed fee or penalty to redeem their property. It does not matter when they pay; the fee is the same. Cory compares it to getting a fine. If you get a speeding ticket, you owe the fine right away. There is no option to pay it over months or get a discount. In tax deed states with redemption periods, the penalty applies the day after the sale.
- Interest rate – The owner pays interest on the delinquent taxes over time, similar to interest on a savings account. The longer they wait to redeem, the more interest they owe. For example, on a lien with a 12 % interest rate, the investor earns 1 % per month. If the rate is 18 %, the investor earns 1.5 % per month.
Both types are attractive to investors, but they work differently. The next sections give examples.
Penalty states: Texas and Georgia
Some states sell redeemable tax deeds. These are sometimes called hybrid states because they behave like deed sales but still have a redemption period. Texas and Georgia are the most common examples.
Texas – When you buy a redeemable deed at a Texas sale, the homeowner must pay you a 25 % penalty on top of the amount you paid if they want to redeem. This fixed penalty applies whether they redeem on day 1 or day 179 of the six‑month redemption period. For example, if you pay $50,000 at the auction, the owner must pay you $50,000 plus $12,500 (25 %) to get the deed back. If the redemption period passes and the owner does not redeem, you can foreclose.
Georgia – In Georgia the redeemable deed works similarly, but the penalty is 20 % the day after the sale If the owner redeems after the one‑year redemption period, there is an extra 10 % added on Cory checked the official county website when preparing his slides. This means you could earn up to 30 % if the owner waits too long. You also have the option to foreclose after the redemption period.
Other penalty states include Connecticut, Tennessee, Delaware and Hawaii. In all these states, investors earn the same money if the owner redeems one day after the sale or just before the redemption period ends. To learn more about hybrid counties and penalty returns, see our guide to the Top 10 Hybrid Counties on the Vault
Interest states: Arizona and Florida
Interest states sell tax lien certificates. The investor earns interest on the unpaid taxes until the owner redeems. Cory uses Arizona and Florida to show how this works.
Arizona – Arizona has a maximum interest rate of 16 %, but investors bid the rate down at auction. If the lien is redeemed one month after the sale, the investor earns 1.33 % (16 % ÷ 12). Each additional month adds another 1.33 % until the lien is redeemed. If the owner never redeems, the investor can start foreclosure after the redemption period.
Florida – Florida is similar but offers up to 18 %. If you get the full rate at auction and the owner redeems after one month, you earn 1.5 %. Each month adds more interest. Our video on Florida tax lien investing (external link) explains how bidding works there. In Florida, you also have the option to buy over‑the‑counter liens if they do not sell at auction.
Other interest states include New Jersey, Maryland, Iowa and Indiana. The interest accrues monthly, so the final return depends on how long the owner takes to redeem. For example, Iowa offers a 24 % rate, but if the property is redeemed after three months, you only earn 6 %.
Adding subsequent liens
Cory notes that investors can also buy subsequent liens if more taxes become delinquent while you hold the first lien. For example, in New Jersey investors bid down the rate on the initial lien, but any subsequent liens you purchase earn the full statutory interest rate. This means you invest more money into the property, but you also earn more interest. This strategy can be powerful if used wisely and the property is likely to redeem.
Before buying additional liens, research the state’s rules and the property’s condition. If the owner never pays, you could end up owning a property with problems. Our article on Understanding a Tax Deed discusses due diligence steps for deed and lien sales and is available in the Knowledge Vault
Quick recap
Cory sums up the main points in the video:
- Penalty states – Usually hybrid (redeemable deed) states like Texas, Georgia, Connecticut, Tennessee, Delaware and Hawaii. The investor receives the same penalty whether the owner redeems right after the sale or at the end of the redemption period. The fee is calculated as a percentage of the price paid
- Interest states – Tax lien states like Arizona, Florida, New Jersey, Maryland, Iowa and Illinois. The investor earns interest each month based on the amount of delinquent taxes. The total return depends on the interest rate and the number of months before redemption.
It may take a few viewings of the video for the difference to “click.” Cory encourages you to watch it again if you are still unsure. Once you understand the concepts, you can choose which type of state suits your goals. Penalty states provide a fixed return, while interest states can offer steady income over time.
Frequently asked questions (FAQs)
Iowa currently offers up to 24 % interest on tax lien certificates. Other high-interest states include Illinois (18 % interest; some investors report a 36 % effective yield over longer redemption periods) and Florida (up to 18 % interest. However, actual returns depend on auction bidding and redemption timing
Interest states pay annualised interest on the unpaid tax amount. Penalty states (also called redeemable deed states) require the delinquent owner to pay a one-time penalty to redeem the property. For example, Georgia pays a 20 % penalty in the first year, while Texas pays 25 % to 50 %
Longer redemption periods tie up your capital. A 24 % interest rate over two years in Iowa might yield a high return, but your money is unavailable during that time. Shorter periods (e.g., Indiana’s six to twelve months) allow you to recycle capital more quickly.
Tax liens are backed by real estate and often take priority over other liens. However, investors must perform due diligence: properties might be worthless, and there is no guarantee of redemption. Investing without research can lead to owning unwanted property or earning low returns.
Begin by educating yourself on local laws, setting a budget, choosing a target market and researching properties. Register for auctions, bid carefully and keep meticulous records. Many counties now host online tax lien auctions, which can be more accessible for out-of-state investors.
Conclusion
Tax lien investing offers the potential for attractive returns, but only for those who understand how the system works. Distinguishing between interest states and penalty states is critical: some jurisdictions cap interest rates at 12‑18 %, while others provide fixed penalties of 20–50 %. Prospective investors should research state laws, perform diligent property analysis and bid strategically. By following the steps outlined above and focusing on well-chosen markets, you can avoid the disappointment of a 1.5 % yield and target the double-digit returns tax lien investing is known for.
Call to action
If you want hands‑on guidance, we offer free resources to help you get started. Explore our Knowledge Vault for maps, state guides and step‑by‑step courses on tax lien and deed investing. You can also schedule a free call with our team to discuss upcoming auction trips and learn how to buy your first tax deed up to 90 % off.
