As a reader of my blog, you will know that I am big on buying profitable websites and have talked about my forays with Flippa in the past.
Today I’m really excited to feature a first guest writer on Cloud Income. Dave is an internet entrepreneur and has worked online for a number of years whilst traveling the world.
What You Will Learn
- Why You Should Invest In Websites
- How To Calculate The ROI
- Performing Due Diligence
- Risks, Issues and Control Requirements
DISCLAIMER: I am not a financial advisor nor am I an expert on many of the investments talked about in this article such as real estate and stocks. Despite what the title implies, please don’t read this article and immediately go out and blindly purchase a website. Investing should not be taken lightly and requires a lot of research on the topic. We will not be discussing how to buy a website in this article.
I’ve been buying websites for about one year. My first purchase was a complete disaster.
The most recent ones have gone a lot better.
Looking over my records, I’ve purchased 12 websites in the last year for a total of about $5k.
So far, I’ve made about $40k.
Albeit, this was 100% driven by having the right contacts at companies who were interested in purchasing links on these websites (this is a much less talked about strategy compared to say Adsense and affiliate sites). For sure, I am not the only person to do it, but it does have some barriers to entry, which is why I don’t want to go into depth about it here for fear of giving the wrong impression.
Either way you slice it, investing in websites has been an excellent and highly profitable business for me and many others and it is definitely something that should be on your radar.
Why You Should Invest In Websites
If you search Google for “What are the best investments” and open up every article that appears on page one, you probably won’t see websites mentioned once.
You’ll see the same old stuff; stocks, bonds, real estate, home improvement, etc.
Websites just aren’t on many peoples’ radar.
Even within the Internet Marketer community – it’s not that pervasive.
In a recent post, Spencer from NichePursuits wrote that he had never purchased a website. Similarly, Pat Flynn wrote in his 2012 goals that he wanted to purchase a website (it is not clear that he never had, but the implication was there).
As you can see, even among these internet titans, websites as an investment is a relatively new thing.
Why is this?
Aside from the fact that investment often connotes some sort of financial derivative due to its historical use, the hard truth is most people are intimidated by website buying.
They’ve heard a lot of stories about getting scammed.
They don’t feel they’re technical enough to pull it off.
They’re worried about a thing called Google that apparently can make your websites up and disappear whenever it wants.
But all this stuff is highly overrated, and it’s time to demystify website buying for the masses.
Let’s start by comparing websites as an investment to more traditional investments like real estate and stocks on the metrics that matter.
- Return On Investment (ROI) – How much money can you make?
- Control – What is your ability to influence the outcome?
- Risk – What is the likelihood of you suffering a huge loss?
- Technical Knowledge – How much do you need to know?
- Barriers To Entry And Cost – How hard is it to purchase?
- Upkeep Required – What do you have to do day to day
Return On Investment
According to this article by business insider, some ROIs for common asset classes are as follows:
Where do websites fit in?
Well, since you won’t see any of the major investment websites talking about them, you simply have to research what experienced buyers are reporting. I would say right now the cost of a website is around 15-20 times its monthly revenue, and most of the articles I found on the subject seem to concur:
Most website owners are willing to let their babies go for 1 or 2 times their annual revenues. For instance, you could probably buy a website that makes $2,000 monthly anywhere from $24,000 up to $48,000. For the sake of simplicity let’s use the middle point and assume you could buy it for $36,000. This means that your annual return would be 66% (compared to 12% on real estate and 20% or 30% with a small business). Additionally, your payback period would be 1 year and a half, compared to 8.3 years with real estate and 5 or 3.3 years with a small business. – Daily Blog Tips
So, even a conservative estimate of a two-year payback yields a whopping 50% ROI, which quite frankly blows the other assets out of the water.
Investments are generally seen as passive. In theory, passive sounds nice. It implies that we don’t have to do anything.
But another way of looking at it is to say that we are completely helpless to exogenous forces.
Take financial derivatives for example. You are completely bound to the market; no one can influence the price of Gold.
Real estate is somewhat in the middle. You can make home improvements to some degree as well as try different marketing methods, but you can’t do anything to change the surrounding area.
Wouldn’t you rather have more control over your investment so you could potentially increase its ROI, while at the same time remaining passive if you wanted to be?
Websites offer the best of both worlds.
What I love about investing in websites is it’s like buying your own little business and making yourself CEO.
If you want to make changes to the content, social media, newsletter, or design you can (and often free of cost). Additionally, these changes are extremely data-driven because you have all the power of Google Analytics, Clicky and other tracking methods to see the effect of your changes. This allows you to test, and optimize, and quicken your payback period.
At the same time, if you just want to buy an Adsense earner and let it sit there, you can.
How likely is your investment to one day go up in smoke and lose a significant portion of its value?
Risk often goes inverse with control. This isn’t always the case of course. A bank account, for example, earns interest, and while you can’t control it at all, I wouldn’t say it’s particularly high risk.
However, the more control you have over something, the more you can do with it if things go bad.
If the real estate market crashes and you’re investing in properties, you’re probably in trouble.
If a company comes out with bad earnings, and you own their stock, you’re probably in trouble.
If a website loses its traffic, well, at least there might be options. You can get fresh links, or seek new forms of traffic.
Of course, we can’t cover all the different scenarios, but suffice to say that if you’re worried about Google wiping your site off the search engine map – forget about it!
Forget Google already.
There are a million and one ways to drive traffic to a website (social media, guest posting, direct advertising). Google is just one of many and even if you do lose ranking, it is possible to make corrections to improve.
These are a lot better options than just waiting for the market to come around, which could take years. On the contrary, if something goes astray with your website, you can usually fix it in a matter of months.
Technical Knowledge Required
One of the biggest factors that scares people about website purchasing is the supposed technical knowledge it takes to run one, compared to more traditional forms like real estate and financial derivatives.
The thing is, it’s not that the other investments don’t require specialized knowledge, it’s just that people are more OK with ignoring them.
How many people really read 10k reports (annual reports filed with SEC about the company’s operations) when they buy a stock? How many people would understand them if they did?
Did anyone see the chart above?
Look at the column in the far right. If this is true, it essentially says that the average investor has no clue what they’re doing. So let’s stop pretending that technical knowledge about websites is any different from judging an attractive location to buy property, or understanding a company’s financials to know if they are going to be profitable 5 years from now.
The bottom line is if you want to succeed at investing, you have to acquire some specialized knowledge about what you are investing in. Websites are no different than any other asset in this regard.
Barriers To Entry And Cost
This is one thing that stocks and websites have in common, there are virtually no barriers to entry.
If you want to go and buy a website, you can do it right now via the various online marketplaces and brokers. Similarly, with stocks, all you have to do is open a brokerage account and voila!
Real estate is a bit more complicated and often requires paperwork, approvals, and can take months.
One very specific barrier to entry is cost.
What does a typical website cost?
Well, websites range in price from a little to a lot (6+ figures), but a typical estimate would be about a few thousand dollars. This is going off the 20x model we discussed earlier. So, a website making $100-$200 a month is going to sell for $2k-$4k.
This is definitely more expensive than stocks, but a far cry less than typical real estate.
Before I mentioned that a website offers a lot of control over what you can do.
But some people may have read that as websites are just a lot of work.
And it’s understandable to want our investments to be passive. Investments are supposed to be making our money work for us.
Firstly, however, we should acknowledge that not all investments are passive. Financial derivatives, sure, but real estate often brings with it dealing with clients, maintenance, and general inquiries. Of course, you can hire a property management company to handle that for you, but that is going to significantly cut into your ROI.
Similarly, websites also might have tune-ups that are necessary and they do have hosting fees. Again, it depends on what you are buying. However, depending on the tasks, a team of virtual assistants might be completely capable of handling most of it (and they’re going to be a lot cheaper than a property management company, that’s for sure).
The financial upkeep is also usually pretty low unless the site functions on paid advertising.
I’ve created a comparison chart to summarize websites, real estate, and stock as potential investments. Of course, this is purely just my opinion and is in part limited by my experience with real estate and stocks. Both of which, of course, has many nuances that are not discussed in this article.
|Investment Metric||Websites||Real Estate||Stocks|
|Control (High is Good)||High||Medium||Low|
|Barriers To Entry (and Cost)||Medium||High||Low|
Suffice to say that websites as an investment deserve more attention than they are getting. In fact, it is largely due to the fact that it not getting enough attention, that it is such a good investment.
A few years from now as people come to learn what we know now, the cost of purchasing websites will increase dramatically.
What experience do you have buying websites and what tips can you share from your experience?
Tags: Website Investing