Today, we have George from WiredInvestors.com here to describe the opportunities and risks associated with website investing and to talk about how investing in income-producing websites could potentially shorten your journey to financial independence!
Hi Fientists. I’m George, and I write about website investing over at Wired Investors. Today, I’m going to share my own financial independence story (which is ongoing) and I’ll explain why website investing is playing a major part in that journey. I’ll describe exactly what website investing is, I’ll lay out some of the pros and cons of website investing versus more traditional investing (e.g in stocks, bonds, and real estate), and I’ll share some resources to help you get started in investing in online properties.
A Little About Me
Up until about a year ago, I was living a life on rails – I had graduated from a good school a couple of years prior, got decent grades, and got a job working as an interest rate exotics trader at an investment bank. This was all fine and good, except that I knew all along that the career path I was on wouldn’t take me to where I wanted to go. I wanted the freedom to live all over the world and to set my own schedule but the career path that I was on would never have allowed me to do that.
Still, I’m rather conservative in my financial decision-making so I didn’t really end up taking action until I was forced to. I don’t want to bore you with the details but basically, I found a new job, handed in my notice, and then had the new job pulled out from under me.
This was followed by a brief period of moping – and then clarity. The universe doesn’t owe me anything. If I wanted a certain lifestyle or a certain level of financial security, I had to go out there and make it happen for myself. Instead of relying on other people to give me opportunities, I realized that I should be actively pursuing the goals that I want to achieve.
So I spent some time thinking about exactly what I wanted. My goals were:
- To be location independent
- To have the freedom to set my own work schedule
- To build up enough income to live on
- To eventually grow my income to the point where I’m comfortable
I live pretty frugally so I had a decent amount of savings from my trading job. There was really nothing holding me back from moving to another country – in fact, it would probably be cheaper in the long run since there aren’t many places that are as expensive as the city that I was living in (Hong Kong). So I decided to move to Vietnam and try to find a way to make it work.
Around that time, I discovered that you could buy income-generating websites – and what’s more, they seemed to be to be undervalued. I was skeptical at first but the marketplaces seemed large enough (and sites listed on brokers seemed to go quickly enough) that I decided that it was at least worth looking into.
I bought my first website near the end of last year. Fast forward about a year, and I’ve managed to cobble together a livable income, I’ve gotten to know a bunch of other people in the online business space, and I’m taking advantage of geographic arbitrage to keep my costs low. My own business is (fingers crossed) slowly growing as I scale upwards.
I know you Fientists are interested in hard numbers, so I’ve included some examples of my successes and failures below.
My Website Purchases
Site 1: Entertainment/Celebrity News/Quotes Site
Stats at Purchase:
Analysis: This was the first website purchase that I made. My hypothesis for this site was that if I put Adsense on it, it would generate roughly $100 a month based on a click-through-rate of 1%. My estimate was more or less spot on – the site has consistently generated around $100 in earnings a month since I purchased the site. However, I’ve had trouble growing the earnings as the site is in a very broad (Quotes and Celeb News) niche that doesn’t lend itself well to monetization. This is the most ‘average’ investment that I made, in the sense that I paid a little less than a 20x multiple, but wasn’t able to improve/optimize the site to significantly increase the earnings. I’d say that this was a good result for a first investment, but looking back, I probably wouldn’t have bought the site if I knew what I know now. I don’t pay much attention to the site anymore – I add content sporadically – probably takes 4 hours a month of upkeep.
ROI: ~60% annualized (I’ve owned the site for about 9 months)
Site 2: Genre Entertainment Site
Stats at Purchase:
Analysis: This was the second site that I bought, and I bought it shortly after the first. I liked the fact that it was a pretty old site (>5 years) and that it was in a reasonably specific niche, which allowed for a variety of potential monetization options. When I say ‘genre’ entertainment, I mean things like ‘crime’, ‘sci fi’, ‘fantasy’, etc.
My immediate monetization plan was to put out an ebook of short stories in the genre and use the website as a marketing platform for the ebook. I outsourced all the writing, and in total the ebook cost about $500 to produce. I published it in April, and since then the book has made ~$2000. Right now the book is generating about $500 a month – it’s unclear how sustainable this income is, but I suspect it will continue at least until the end of the year. I also have the option to repeat this process and release another ebook to further improve the monetization of this site. The difference between this site and the Site 1 is the clear path to monetization that I saw. The site used to generated a small amount via adsense, but I removed those ads to improve user experience on the site.
ROI: 72% annualized so far (taking into account the months when the ebook wasn’t published yet as well as the $500 cost of putting the ebook together)
Site 3: Viral Meme Site
Stats at Purchase:
Analysis: This was bit of a flyer – the site was getting a ton of interest on social media and reddit, but I knew it had a short shelf life because it revolved around a single meme. The only way for me to turn this investment into a success was if I managed to convert the site into something longer lasting. It didn’t end up working out, but my initial investment was also pretty small. This is the only investment that I made that I would classify as a failure. Luckily, it was only my smallest website investment to date so I don’t feel too badly about it, especially since I knew it was somewhat speculative.
ROI: 0% annualized (the site actually made some money at the beginning, but I won’t include it since it’s not sustainable)
Site 4: Amazon Affiliate Site
Stats at Purchase:
Analysis: I’m normally not a fan of purchasing Amazon Affiliate sites as I don’t think they’re really suitable as long term investments, but the multiple on this site was too good to pass up. After I purchased the site, I tweaked the most popular page to try and increase conversion rates. The tweaks that I made helped increase the earnings of the site significantly – up to about $350 a month. I’ve owned this site for about 7 months, and I’ve already recouped my initial investment (keep in mind that it is also possible to resell this asset at a later date as long as it still generates earnings).
ROI: 210% annualized
When I initially started looking into buying websites, I was interested in sites that had large amounts of traffic that were under monetized. Since most websites get sold based on a monthly earnings multiple, I figured the easiest way to find ‘undervalued’ sites was to find sites that were under monetized. While my first instinct was broadly correct, nowadays I’m looking for sites that are under monetized, but also have a clear path to monetization as well. On my first site purchase, I found it pretty difficult to think up new ways to monetize the site because the content of the site was too generic. Generally speaking, the more targeted an audience is, the easier it is to find affiliates or create products that will be of interest to them.
Investing in Websites for Fun and Profit
The Mad Fientist has actually already had a couple of guests on the podcast who’ve talked about buying and selling websites (Justin Cooke from Empire Flippers and Billy from Forever Jobless), so I’ll try my best not to rehash anything, but my goal of this post is to try and help you realize the potential (and the accompanying risk) of investing in websites.
I’ve already been over my finance background, so it shouldn’t surprise you that my approach to buying websites differs a little from the typical website buyer.
From the perspective of a typical online entrepreneur, buying websites doesn’t necessarily make sense – after all, these are mostly people who’re used to bootstrapping and building things from scratch. It’s no surprise then that websites seem expensive to them – typically websites are sold at 20x-35x monthly earnings.
To someone from the finance world however, 20x-35x monthly earnings seems cheap, especially when compared to more traditional assets like stocks and bonds.
For example, the long-term average P/E of the S&P 500 is 15 whereas 35x monthly earnings translates into a P/E of 3.
Corporate bonds yield about 5% right now whereas a website priced at 35x monthly earnings will yield 34% annually.
Keep in mind that bonds and equities are much more passive investments than websites, so it’s natural that there is a divergence in terms of returns.
The most apt comparison for investing in websites is probably real estate. Websites and real estate are similar in that both require maintenance/upkeep. Also, if you wanted to boost yields on either one, you’d have to either DIY it (which costs time) or hire a professional (which costs money). Right now Real Estate in the US is on average yielding about 9% (this is gross yield). You can compare that 34% that we mentioned earlier for a website priced at 35x monthly (which is on the high end).
On the other hand, it’s undeniable that the average lifespan of a real estate investment will be significantly longer than the lifespan of a website – it’s up to you to decide whether the increased average yield from website investments makes up for the shorter investment lifespans.
I don’t want to get too much into the nitty gritty details of exactly why I think websites are undervalued – I’ve actually already written about this at some length in a guest post on the Empire Flippers blog.
I also want to note that I am not encouraging anybody to go out and buy website immediately. Websites can potentially yield great returns, but they are also substantially riskier than stocks, bonds, or real estate – and this is doubly true if you don’t first take the time to learn how to do website due diligence and pick up the fundamentals of website management.
There are definite risks involved with website investing that don’t really exist with more traditional investments. Here are some of the most important ones:
- The website marketplace is currently totally unregulated – whether it’s over exaggeration of earnings or outright fraud, it’s up to you to protect yourself by doing good due diligence – there’s no SEC to turn to if something goes wrong.
- Buying and managing websites requires a specific skill set that you need to be willing to learn (e.g basic css/html, search engine optimization, conversion rate optimization, etc.). While you don’t need to be an online business expert right out of the gate, you definitely need to be willing to pick up some of the basics to be able to manage a website successfully.
- You have virtually no legal recourse if you get scammed/defrauded – in some cases, sellers and buyers will exchange contracts, but even if there is a contract in place, it will be difficult to enforce since many transactions take place across borders. This makes good due diligence absolutely essential. If you’re not willing to put effort into learning and practicing good due diligence, then you should definitely look elsewhere.
- Marketplaces like Flippa are a bit like the Wild West – there are a ton of scammers out there. To avoid outright scams, you can try to do deals through website brokers, but typically valuations will be higher when you buy through a broker. Website brokers also vary in terms of quality, so you should still always protect yourself by doing your own due diligence.
- The lifespan of a website will on average be shorter than the lifespan of more traditional investments like listed equities or real estate. I’m pretty confident that Nestle will still be around in 15 years – I can’t necessarily say the same about some of the websites that I’ve purchased.
Despite these risks, websites are undervalued compared to other asset classes because they remain largely undiscovered so if you’re interested in financial independence, buying (or building) websites as a way to either supplement or replace your income is something that you should look into.
There are a few caveats though. The first and most important is that under no circumstances do I think it is appropriate to invest in websites that you can’t afford. Buying websites is already risky, and is best suited for those who’ve already got some savings that’s earmarked for investing. This is not the kind of investment that you want to stretch yourself financially for. Another thing to keep in mind is that owning a website is nowhere near as passive as owning stock or bonds – and there aren’t that many people out there who understand all the different aspects of maintaining and managing websites. For this reason, I strongly encourage you to start off with a relatively small investment.
An experienced online entrepreneur summed it up perfectly when he said this:
Websites are undervalued if you know what you’re doing, and fairly priced if you don’t
I can’t agree more with this quote. People who take the time to learn about website investing will probably do pretty well over the next few years – at least until market inevitably corrects itself and erases the relative undervaluation. On the other hand, people who just jump right in without attempting to learn basic online business skills will probably do poorly – at best, they’ll get average returns.
So how can you get started?
- Due Diligence Tips (some of the advice is outdated and no longer applies)
- Forum (Tons of useful tidbits here if you’re willing to look through old posts. It’s not that active any more though)
Smart Passive Income
- Websites are undervalued compared to other asset classes
- Websites are also riskier than other assets
- Investing in websites requires learning a new set of skills
- Those who want financial independence should at least look into website investing
- Beginner investors should start small and learn all they can about the field
George is a website investor and writes about website investing, due diligence, and earnings optimization at WiredInvestors.com. In a past life, he was a trader at an investment bank, but nowadays he spends most of his time in coffee shops browsing reddit whilst he should be working.