For the mildly tech-savvy, internet property is the smartest place to put your hard earned dollar right now.
Compared to traditional forms of investment, internet properties have a payback period that blows everything else out of the water. Most webmasters are willing to part with their pride and joy for 12 to 24 times monthly revenue. This means that simply buying and maintaining an established website without making any improvements will get you somewhere between 50 and 100 percent annual returns!
Compare this to traditional real estate which can generate 1.1% of total value per month at best, yielding 13.2% annual return. Long term stock market investors expect to see similar average annual returns.
The reason the return on websites is so high is a combination of the large scale of the internet user base, growing consumer trust online, and a lack of interest from old-school investors.
More and more money is changing hands online, and the internet is still in its Wild West days. Sooner or later, mainstream investors will catch on to the trend and the payback period on websites will grow longer and longer, until they match traditional investments.
So how can someone with limited technical knowledge begin investing in websites?
Just as you do when entering a traditional market, you should build an understanding of how the internet works, what a website actually is, along with techniques used to monetize a website. The learning curve isn’t very high with Internet Real Estate – if you know what is important and focus on what matters most.
A website draws in visitors in three ways.
Direct traffic: Visitors type http://yoursite.com directly into their browser.
Referral Traffic: Visitors follow a link from another site to your site.
Search Traffic: Visitors find your site using a search engine.
Technically, search traffic can be considered referral traffic, since you are actually following a link from the search engine’s website. But it is treated as a completely different category, since search algorithms decide where that link shows up instead of human, which is the case in most referral links.
Just by sheer volume of potential visitors, search traffic is the most important form of traffic to focus on as an internet investor. When done right, traffic from search engines can flood your site with targeted consumers – ready to spend money.
It is also worth mentioning that websites with a large, active, social media following can draw a massive amount of visitors at will. Sites with a large social media following can sometimes get much more referral traffic (from social media interaction) than search traffic, which is best-case scenario for a website owner since you are less reliant on Google’s algorithms for your success.
For these reasons, the two types of websites that I think you should focus on as an internet investor are “Niche Authority Sites” and “Membership Sites.”
Niche Authority Sites
A “niche authority site” is a website that is the leading resource for a specific, narrow subject. The reason the niche needs to be narrow is because the internet is simply so huge today, that becoming the ultimate resource on a broad subject (ie. Golf) requires a ton of resources. Unless you have the resources at your disposal to play in the big leagues (in which case, you would have no interest in this article) – find a website that has the potential to dominate its niche, and become the ultimate resource.
A niche authority site tends to have a loyal readership of people who find value in the solutions the site provides to them. Authority sites also tend to have a ton of original content which search engines will crawl and index. These two factors provide the site with reliable traffic that is easy to convert into buyers.
To learn more about building an authority site from scratch, I highly recommend following Pat Flynn’s “Niche Site Dual” series over at SmartPassiveIncome.com.
A membership site is a website that offers some type of product or premium content, in exchange for a monthly (or yearly) fee. There are countless examples of membership-based websites out there from giants like Netflix, to smaller operations like Ramit Sethi’s Earn 1K Program. While neither of these will likely be for sale, there are small membership sites that have a loyal following, with very consistent revenue that you can buy.
The best part about membership sites is that they have very reliable revenue, and tend to market themselves once momentum is built up.
How does a website make money?
As you can (hopefully) see in the diagram above, a website can make money from a number of ways that all depend on getting visitors to the site – and getting those visitors to take action. The all-powerful click (or tap) is what drives today’s multi-billion dollar internet space. The reason behind that click can be broken down into these three monetization methods.
Advertising: Google’s AdSense program is the largest player here. Google AdSense (and other similar programs) offer a “pay-per-click” program in which advertisers are charged each time a visitor clicks on their ad, and you (the webmaster) are paid a percentage after Google takes their cut.
Products: You can offer products on your for sale. Standard E-commerce style (where you directly sell your own products), or as an affiliate (where you promote other’s products and earn commission). The largest affiliate network is ClickBank – which has so many products, I guarantee you can find one that matches your niche.
Membership: As we mentioned before, you can charge users for a product (usually software), or premium content – or even a combination of both.
Where to find a website for sale
Ok, we talked about the general types of sites to look for, but how do you know if a site is ripe for purchase? And where can you go to buy a website? Ebay?
The largest marketplace for websites is Flippa.com. After a recent update to their hierarchical listing structure, it is super easy to browse through different categories and types of sites. Flippa works on a reputation-based system, similar to Ebay, and also integrates with Escrow.com to ensure safe transfers.
For the internet investing novice, it is sometimes easier to work with a broker, who will do much of the work for you (for a fee of course). To find a broker, just type “website broker” or something similar to Google and have a look yourself, since there are so many out there it would be difficult to list.
Look for weakness and opportunity
When you’re looking for a website to purchase, it’s important to realize that you are not looking for a perfect website. In fact, imperfection is what we are looking for. The reason for this is simple – if you want to maximize the return on your investment, you need to be able to increase revenue as much as possible.
An ugly website is a good sign. What you should be looking for is:
A large amount of original content
Consistent visitor traffic
Mild success in the search engines and/or social media
Conversion of visitors to buyers (sales)
These factors indicate a solid foundation from which you can build upon. Many people end up spending more than they should because they are distracted by superficial factors, such as the design and other “hype” that the seller instills.
Before you start to bid on the site you’ve identified, you must conduct the necessary due diligence.
Verify claimed traffic: You should ask the seller for a snapshot of their Google Analyticstraffic at the very least.
Verify claimed earnings: Again, screenshots of earnings reports are a must.
Verify site ownership: Luckily, Flippa does this for you. If you aren’t using Flippa, you need to take measures to make sure that the person you are communicating with actually owns the site.
Check backlink health: Use a tool like Majestic Site Explorer to check the health of the website’s backlink profile. Pay particular attention to Citation Flow and Trust Flow (Guide).
Establish communication: Contact the seller and ask questions to get a feel for their level of experience and competency. It’s also a good idea to ask them about their most profitable products (if applicable).
What’s a good price?
Always make money on the buy, not the sell. Purchasing the right site for the right amount is significantly more important to your long-term returns than whatever you will ultimately sell the site for (if you even decide to sell). This is because a website makes money month after month, and getting a good deal on the right website will help you maximize the monthly income.
As a rule of thumb, 10-15 times monthly revenue is a great price for a website. Anything less than 8 times monthly revenue should make you suspicious. However, keep in mind that the real indicator of the value of a website is future income. If you are confident about future growth opportunities, it makes sense to spend a bit more. At the same time, be wary of risks to future earnings like waning trends or obsolete niches.
Growing your new website
Once you’ve acquired your new website, you need to spend time to come up with a growth strategy. Randomly writing new content and posting to Facebook isn’t going to give you good results.
Refer back to the mental model above, when we discussed how a website makes money. You can see that income will depend on the types of monetization methods you choose and the volume of visitors that you can funnel into these methods.
For all you math lovers, think of website monetization as the following equation:
(Traffic Volume) x (Conversion Rate) x (Profit Per Conversion) = Revenue
While initially you can go with your gut when choosing a monetization method, you need to test, measure, and compare to figure out which method works best for your audience and for your wallet.
To increase the volume of visitors purchasing products or clicking on ads, you can do two things.
Increase Conversions: This involves increasing the percentage of visitors that make purchases/click. Again, the key here is to test, measure, and compare to find what kind of text, layout, and design schemes work best for your audience.
Increase Traffic: Increasing the volume of people that visit your website will also increase your revenue. This can be done by conducting keyword research to identify high-traffic/low-competition keywords to target when writing content, producing content that goes viral on social media, networking with other website owners, and building up an email list.
A final word
Hopefully this article has helped shed some light on the mysterious world of internet real estate, and you can apply these methods to build your own portfolio of websites. For the sake of brevity, I know I left out some of the fine-grit details. So feel free to post any questions in the comments!