Investing can take many forms: stocks, bonds, real estate and even pictures of monkeys. *sigh*
However, there is another asset class that is seldom talked about: websites.
Buying a website has the potential to be an excellent investment. They represent scalable digital assets with low overhead and the ability to offer better returns relative to traditional asset classes.
As a result, this post will cover:
- TVM Case Study: Investing in Stocks vs Websites
- Understanding How Websites Make Money
- Two Approaches to Investing in Websites
- How to Value a Website
- How to Buy Websites as Investments
- The Pros & Cons of Buying Websites as Investments
Let’s dive in!
Affiliate Disclosure: Some of the links below are affiliate links, meaning at no additional cost to you, I will earn a commission if you click through and make a purchase. Please read my disclaimer for more information.
TVM Case Study: Investing in Stocks vs Websites
Let’s assume that we have $50K to invest.
How will that $50K potentially perform if it was invested in stocks vs a website?
Let’s model out the potential performance under the following assumptions:
Stocks Assumptions
- We will make a one-time $50K investment into an S&P 500 Mutual Fund (VTSAX)
- The historical average annual return of VTSAX is 7.71%
- Note: This includes the fund’s expense ratio and dividend yield
Website Assumptions
- We will purchase a website for $50K
- The initial traffic for the website is 126K page views / month
- We will publish an additional 4 / articles a month with each new article bringing in an additional 1000 organic page views
- Page RPM = $10
- Our average monthly hosting fees = $10.94 / month
- Note: This was calculated by averaging the cost of three 36 month terms & one 12 month term with Siteground.
- When valuing the website’s worth, we will assume an earnings multiple of 40X (more on that later)
With our parameters established, we get the following model:
Note: The data visualizations are interactive; hover over sections of the graphs for more detailed information.
At the end of the 10 year period, the mutual fund ends up being worth an estimated $105K, translating to an overall cumulative return of 110%. The mutual fund’s growth can be entirely attributed to the consistent 7.71% returns, compounding year-after-year.
On the other hand, the website ends up being worth an estimated $242K, translating to an overall cumulative return of 384%. The website’s insane growth can be explained by:
- Consistently publishing new content, leading to…
- Increased organic traffic, leading to…
- Increased page views, leading to…
- Increased revenue!
So if the website’s growth is directly correlated to how much content is published to the website, what would happen if we cut content production in half?
As we can see, the website still pulls out ahead with the final value being worth $41K more than the mutual fund at the end of a 10 year period.
So what would have to happen for the mutual fund to be worth more?
After crunching the numbers, this particular website would need to publish at least 14 pieces of content a year in order to be equivalent to the value of the mutual end at the end of 10 years. Anything less than 14 pieces of content a year would result in the mutual fund being worth more.
As we can see, an understanding of SEO as well as the ability to write awesome content can potentially pay out large dividends (literally).
Understanding How Websites Make Money
Before investing in websites, it’s important to understand how websites make money.
In a nutshell, there are three primary ways how websites can generate revenue:
Display Ads
Display Ads are advertisements placed on a website that are usually embedded in posts and other white space on the website. These can be placed on your website by joining advertising networks such as:
Affiliate Marketing
Affiliate Marketing is linking to a marketplace that sells a product or service and in exchange the website earns a commission. The most popular affiliate marketing program is Amazon Associates.
Digital Products
Digital Products are products that websites can sell directly to people who visit a website. This can include selling items like e-books, courses, access to different tools, etc.
Two Approaches to Profitable Investing in Websites
When it comes to investing in websites, there are two primary approaches on how we can make money.
Approach 1 – Websites as a Stream of Income
With this approach, we are investing in websites in order to 1 of 2 things:
- Build an additional stream of income (i.e. passive income)
- Replace our current income (i.e. W-2 employer income)
Either way, this approach will naturally have us invested in a website for a longer period of time.
As a result, we need to ensure we are taking a more active approach to managing the overall health and position of the website. It’s imperative to make sure that we are evolving our website to manage certain long-term risks associated with investing in websites such as:
- Rise in Ad blockers
- Algorithm Updates
- Increased Competition
- Topic Relevancy Over Time
Investing in a website and not having a plan in place to counteract these long-term pressures can increase the chances of a website becoming an unprofitable investment. On the flip side, taking on a more active role in mitigating the above risks can result in a website investment becoming a lucrative stream of income.
Approach 2 – Flipping Websites
The second approach to investing in websites involves flipping them for a profit.
Similar to real estate, flipping a website is done via the following 3 steps:
- Buy Website
- Grow/Optimize Website
- Sell Website
The underlying idea is increasing the value of the website so that we can turn around and sell it for a premium lump sum at a future point in time.
This naturally leads to the question, “How can we appreciate the value of a website?“
The most common methods are as follows:
- Buying websites that are undervalued (for how to value a website, read on!)
- Optimizing the website’s monetization methods (Ads/Affiliate Placement)
- Improving the website’s SEO for more organic traffic
The primary benefit of flipping websites is they are relatively shorter-term investments. As a result, they are not exposed as heavily to the longer-term risks discussed in the previous section.
However, this doesn’t mean flipping websites is any easier or comes without risk.
In fact, successfully flipping websites requires a person to be a lot more tactical than someone investing over a longer-term.
Not only do they have to have understand how websites work, but they also have to be able to make unbiased assessments with potentially not a lot of data in order to understand the current standing of a website and it’s potential to sell for a premium in the future.
How to Value a Website as an Investment
We see a potential website for sale, is it a steal or scam?
In order to determine that, we need to have an idea on how to properly value websites.
One of the most popular ways to value websites as investments is with the following formula:
Let’s break the formula down into more detail.
Net Profit
The first variable that we need to know is the website’s average net profit.
We can get this number via the following formula: Revenue – Ongoing Expenses.
In a perfect world, we would like to have as much history as possible when calculating the website’s average net profit.
At an absolute minimum, we should understand what the average net profit was for the last 12 months. Why 12 months? That will give us enough data to gather two important conclusions:
- Is the net profit increasing, decreasing or remaining consistent?
- Is there any seasonality associated with the website?
By only providing buyers with 3 – 6 months of data, it’s easier for a seller to cherry pick their data to artificially raise the website’s valuation.
Moral of the story: the more data the better.
Earnings Multiple
While calculating net profit is relatively straightforward, settling on a realistic earnings multiple can be a little more challenging.
As an example, imagine a website earning an average net profit of $1000 / month. Is that website worth $25,000 (25X) or $40,000 (40X)?
The answer is that it depends on a lot of different factors.
With that being said, the first thing that we can do is research what similar websites have sold/are currently selling for.
As an example, if we did an analysis and found that websites in a particular niche sold with an average earnings multiple of 32X, then we can use that as a baseline.
From there, we need to adjust the earnings multiple based on a comprehensive audit of the website.
This includes getting answers to questions such as:
- What do the website’s backlinks look like? Are they strong or spammy?
- Where is the traffic coming from? Is it mostly social, paid or organic?
- What is the niche? Is it controversial or non-advertiser friendly?
- Is the website’s monetization optimized? Can things be adjusted for quick results?
- What is the website’s overall traffic trajectory? Is it trending up or down?
The answers we get to these types of questions will either increase or decrease the earnings multiple that we established earlier.
If the earnings multiple is lower but our research signals a lot of positive attributes … then the website may be undervalued and we could get a deal. However, a website can also have a low earnings multiple because the seller knows something about the website that we don’t.
Furthermore, a higher earnings multiple could mean that it’s a very strong and legit site. It could also mean that the seller is overvaluing the website and we could potentially be getting ripped off.
At the end of the day, as with any investment, we need to do our due diligence in understanding as much as possible about the website before making a decision.
How to Buy Websites as Investments
If you are looking to buy a website as an investment, I would argue it’s critical to do it through a reputable third party website brokerage firm.
While not perfect, third party brokerage firms can offer services such as escrow services and spam detection to decrease the risk of being scammed.
Below are a list of some of the bigger legit website brokers that offer a variety of different services associated with buying/selling websites:
The Pros & Cons of Buying Websites as Investments
Pros of Buying Websites as Investments
Decrease our Path to Financial Independence
Investing in websites has the potential to build streams of passive income.
And as we’ve discussed before, passive income can help us retire early.
That is because assuming a 4% withdrawal rate, every $1.00 we earn in passive income translates to $25 less that we need to save up in a standard retirement portfolio.
And if we can scale and optimize a website investment, we can begin to see how that can substantially decrease our path to financial independence:
Great Business Model
Websites have one of the simplest and most effective business models that can possibly exist.
That is because:
- Websites don’t deal with psychical inventory
- Websites can operate without employees
- Websites can receive free traffic via Search Engine Optimization
- Websites have little to no barriers to entry
- Websites have very little overhead costs (hosting, etc.)
As a result, websites as investments have the ability to scale exponentially with very little friction.
And the best part is that there are a lot of great free resources detailing how to do this. You can find a few of my favorite free resources in my 7 lessons I learned in my first year of blogging.
Cons of Buying Websites as Investments
Active Management & Growth
While investing in websites can be pretty hands off, as we saw earlier in our case study, they are still businesses and require some degree of active management in order to grow.
This includes but is not limited to managing:
- Google Updates
- Content Effectiveness
- Keyword Research
- Monetization
- Increased Competition
Dealing with these different factors does take time.
However, can’t we just outsource some of the work?
Sure, but at the end of the day, we are still the captain driving the ship.
Research is Critical (or else)
If you plan on buying an existing website as an investment, it’s absolutely paramount to do your research. A lack of due diligence can significantly increase your chances of getting scammed and potentially losing a lot of money.
A website that looks perfectly legit could actually be a gilded piece of shit. Whether that is because of shady link building or inflating traffic/revenue through bot revenue scams, it’s important to comb through and understand the website’s full and complete history.
We can decrease our chances of getting scammed via the following:
- Request Read-Only Access to Google Analytics (verify traffic)
- Verify the Backlink Profile via tools such as Ahrefs or Semrush
- Requesting & Reviewing Income Statements
And remember the golden rule, if it looks too good to be true… it probably is.
With a lot of money potentially at stake, doing the research upfront is worth it’s weight in gold.
Final Thoughts
When I first started my path to financial independence, I thought I was going to stick with the tried and true recipe of stocks & bonds, maybe throwing in a potential pinch of real estate.
However, as my life goals have changed and I have learned more about the potential of websites, I have become more and more impressed.
For me, I like the idea of a potential passive income stream that is more within my control to scale based on the effort that I put into it relative to other types of assets. With assets like real estate or other securities, there is nothing you can do but hope the value goes up.
Do you think buying a website is a good investment? Have you ever considered potentially adding a website to your portfolio?
Thank you for reading! 🙂
_
Full Disclosure: Nothing on this site should ever be considered advice, research or an invitation to buy or sell securities, please see my ‘Terms & Conditions’ page for a full disclaimer.