In a recent post about alternative investments, I wrote about how to invest in websites (#7 on the list). There are a few ways to do it and I barely scratched the surface.
Another blogger read that post and offered to go further in depth with a guest post, specifically about buying niche websites for extra income. He’s purchased two Amazon affiliate sites with success and started his own financial independence blog too.
Please welcome Jim from AcceleratedFI.com. If you’re interested in making extra money by investing in niche websites, be sure to check out the free resources in the “Wrap Up” section toward the end.
You’re probably familiar with investing in real estate by purchasing rental properties or investing in REITs. But did you know you can invest in a digital version of real estate?
By purchasing existing websites or building your own website from scratch, you can build up steady, cash flowing, digital properties that spin off passive monthly income and can be sold for 2-3x the annual income from these websites.
These websites can create another income stream to provide additional stability for your finances and help diversify your income to protect you from job loss or other financial problems.
In this article, I’m going to cover how to invest in websites (aka digital real estate). Here are some of the things I’ll cover:
- How I wasted $5,000 trying to trade options
- The website business model
- How I bought my first site for $12,000
- Website cash flow vs physical real estate cash flow
- The pros and cons of investing in websites
- Next steps to build your own site or purchase one
Options Trading Disaster
In the middle of 2017, I decided I was going to try to beat the stock market. After several years of saving I had accumulated about $25,000 in my Roth IRA. I transferred $20,000 over to a lower cost brokerage (Tastyworks) and started trading options.
I signed up for a few subscription services where I could follow along in real time with the trades more experienced people were making and follow their trading ideas.
Note: I only did this with my Roth IRA. My 401k is quite a bit larger and is safely tucked away in index funds, you can put away the pitchforks 🙂
At first, it was a little rough and I started lagging behind the S&P 500. The index was up 2% and I was down 5%. But it had only been a month and I knew I needed to give it some time. Let the numbers work out in your favor, they said. Just stick to the program…
So I did. And I kept losing.
After 9 months of tracking my results, I was down 20% while the market was up 14%. Clearly, this whole options trading thing wasn’t working out. I needed to focus on what I was good at and try to make money in an area that I would actually have the advantage.
How Product Affiliate Websites Make Money
The business model for websites is pretty simple. It goes like this:
- Find something people are searching for in Google like “what’s the best microwave”.
- Write an article that covers the topic/answers their question. Include a link to Amazon to buy that microwave.
- Rank #1 on Google so you get a lot of visitors to your site.
- When someone clicks on an ad or a link and buys something, you earn a commission.
The most popular ways for websites to make money are by showing ads or by linking to affiliate programs like Amazon. If you click a link on someone’s website and you end up buying something from Amazon in the next 24 hours, the owner of the website will receive a commission which is usually around 5% of the cost of the product.
Then you repeat this process over and over until you’re getting thousands of visitors per month and making a nice stream of income. I knew this business model worked but I had never put in the time to create my own website that would make me a solid income.
So I decided to invest my existing savings into purchasing a website instead.
Buying My First Website
Over the last few years, I had tried building a couple of websites so I had a decent understanding of how to create websites, get them to rank in Google, and make money on Amazon.
I mostly learned about how to invest in websites by listening to podcasts (here’s a list of my favorite podcasts for starting a side hustle) and reading everything I could find online about building websites. I owned a couple of websites but I had never put much effort into them. I didn’t write many articles and I was only making about $25 per month at the time.
Then I found a website on Flippa.com for sale that was making $500 per month. The seller of the website had done a nice job but their website had some design issues that I knew I could fix and immediately increase the earnings.
The seller was able to get some really good links from some larger more established sites so they were ranking #1 in Google for a keyword that was getting a couple thousand searches per month in Google.
I talked to the seller and he agreed to sell me the website for 24x the monthly profit. This is a pretty standard multiple in the website industry. For some websites that are older or more established that number can be as high as 36x monthly profit but usually not much higher.
Compare that with a stock index like the S&P 500 which has a P/E ratio of 25x annual earnings right now based on all of those companies’ profits.
To translate that into a monthly profit multiple, the S&P 500 is currently going for a 300x monthly profit multiple. Suddenly a website at a 24x multiple looks like an appealing investment 🙂
So I bought that website.
Then just a few weeks later another website came up for sale that was also making $500 per month. The owner of this website had tried to sell it before but didn’t get much interest so he was willing to sell it to me for 20x monthly profits.
After it was all said and done I had spent $22,000 and had acquired 2 web properties that were cash flowing $1,000 per month.
Website Cash Flow vs Physical Real Estate
If you’ve ever invested in real estate before or even looked into it briefly, you’ve probably seen a lot of talk about cash flow. This is basically taking the monthly rental income and subtracting all of the expenses like the mortgage, insurance, repairs, vacancies, property management, etc.
For example, on a $50k house, you might rent it for $650 per month and have expenses of $550 per month. This would net you a monthly positive cash flow of $100 which would be pretty good for a house that cheap.
But to buy this house, you have to put down 20% of the purchase price which is $10k.
So you put up $10k, find tenants (and hope they don’t destroy your house!), deal with broken toilets, bed bugs, etc and at the end of the year, you’ve got $1,200 in cash in the bank ($100 per month x 12 months).
Compare this to the website I bought for $10k. The only expense I have is the hosting and domain which are about $5 per month. So my monthly cash flow is essentially the entire $500.
At the end of 1 year, I’ll have $6,000 cash in the bank. 5x more than if I had invested in physical real estate.
Here’s what my earnings look like so far this year. You can see where I bought the websites in March and in the last 6 months I’ve earned about $6,000 in income.
But there’s a reason that websites trade for such a low multiple of the profit. The increase in reward is due to the increased risk and websites have plenty of it.
The Pros and Cons of Investing in Websites
I’m going to give a short list of the pros and cons and touch on a few of my favorites.
- Low multiple = higher cash flow.
- You have 100% control over future earnings.
- You can drastically increase earnings and sell the site later.
- Can be passive.
- You have to know how to run a website.
- Google algorithm updates can tank your earnings.
- Will never be 100% passive without a decrease in earnings.
My favorite reason to invest in websites is that it gives you control over the future earnings. If you buy a rental property or an index fund, you don’t really have much control over how much money it makes.
You can’t just double or triple your rents on a rental property (well you can but good like finding a tenant). You can’t demand a company to pay you 3x as much in dividends next year.
But with a website, it’s totally possible to 3x your earnings in a year. I already went over how websites make money earlier so all you have to do is more of that. Write more articles (or hire people to do it for you!), get more exposure in Google/Pinterest/Facebook, etc.
If you put in the effort, you can drastically increase how much money you’re making on your website which simply isn’t possible in almost any other part of your life. Go ask your boss to triple your salary next year and see what he says 🙂
Another nice thing about a website is that it can be somewhat passive.
My websites continue to get traffic and earn money even when I’m not working on them. I’ve separated my time from the money I make so I’m not limiting my income anymore by how many hours I work. Of course, I have to work on the website and add new content but I can take a break for a week or a month and not have any decline in earnings.
OK, this all sounds good, where do I sign up?!….not so fast.
There are some cons with this business model that you need to be 100% aware of before jumping in. Seriously. Don’t skip this part. There are VERY real risks that could cost you a LOT of money.
The first con is that you need to actually know how to run a website.
Anyone can buy a share of $SPY and reap the dividends and capital gains of the S&P 500 index. You don’t need to understand how it works, you just have to buy and hold.
But a website is different.
You need to have an understanding of SEO (search engine optimization), WordPress, writing articles (much different than the writing you learn in school), how to monetize your website, etc. Most people don’t know these skills because they don’t need to. It’s pretty rare that someone’s day job would actually have them working in any of these areas outside of digital marketers.
But the good news is you can learn them. I didn’t know ANY of this stuff when I started but over the last few years, I’ve been able to teach myself all of it through taking online courses, watching videos on YouTube and listening to podcasts.
With Google and YouTube, you can pretty much teach yourself anything these days.
- Don’t know how to install WordPress? Just watch a video on YouTube.
- Not sure how to get started with SEO? Google it.
- Don’t know how to use Pinterest? Look it up on…Pinterest
Surely the person ranking #1 has it figured out 🙂
If you’re willing to put in the time and effort, you can teach yourself these skills and create additional streams of income that would have never been available to you before.
Another issue with websites is that they’re vulnerable to updates by Google, Facebook, Pinterest, etc which can cause a decrease in traffic and earnings.
The website I purchased for $12,000 was ranking #1 in Google for a specific search term about the best kind of X product. After a few months, I had moved down the ranks to #4. Now, instead of getting 4,500 visitors per month I was only getting 2,000. This was a 50% drop.
Fortunately, I had planned a contingency for this and diversified by having other articles created so I wasn’t so reliant on a single search term for my income.
There are thousands of horror stories online of people who were making 5 or 6 figures per month until an algorithm got updated and their website tanked and lost 90% of their earnings.
You won’t have this happen if you’re just buying index funds. They’re steady, reliable and although it’s possible for them to drop in value quite a bit as we saw in 2008, overall you can count on them to be more reliable and bounce back from these losses.
In fact, when they drop in price you can afford to buy more shares which means you’ll make even more money when the price recovers.
Contrast that with a website where the earnings can tank and you aren’t able to just wait for it to recover. You have to be able to troubleshoot why it happened and know what to do to fix it. This isn’t an easy thing to do and it’s a very real risk to consider before you get involved with this business model.
Wrap Up – How to Invest in Websites for Extra Income
If this is the first time you’ve ever heard of this business model, I’d highly recommend you don’t jump right into buying a website. I’d recommend to start your own Amazon affiliate site and learn the ropes.
It’s better to go through the trial and error on your own site that costs $10 to build than it is to drop $20k on a website only to find out you don’t know what you’re doing and you have nobody to help you when things go wrong (and they will).
There is a whole lot more that goes into buying and running websites successfully than what I covered here. If you want to check out more info on this I’ve got a guide on how to do some due diligence before buying a website which will show you some of the common issues with websites that are for sale on marketplaces like Flippa so you can avoid buying a lemon.
If you want to buy a website and have a budget of $25k or more, I’d recommend checking out Empire Flippers. They do more vetting than Flippa and have higher quality websites for sale. They also have listings for other types of businesses like e-commerce shops and software products. I used them to sell my Amazon FBA business for $40,000 which sold physical products on Amazon.com and the experience was fantastic.
If you’ve got any questions just leave a comment or send me an email at [email protected] and I’d be happy to help!
Thanks to Jim for providing this guest post today and teaching us about how to invest in websites. Check out the linked resources above to learn more.
Photo credit: 27707 via Pixabay
Craig is a former IT professional who left his 19-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.
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