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Real estate investment - 2007 style



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Following from our very popular 101 best ways to earn money on the net this is a story about a little known investment opportunity that outperforms almost everything else in the market. It has a low entry barrier - even $5-10 is often enough to start - and anybody with an internet connection can take part.

It's easy, it's safe and generates a higher return than bank deposits, rising stock markets and even the largest property booms. It outperforms every single asset class from bonds to buildings, and there are people who have made millions out of it.

Yes, it's investing in domain real estate. Not any old domains but investment class ones, domains that don't have sites built on them, don't require maintenance, don't require anything more than the occasional renewal, but still generate a phenomenal return on investment that puts most other assets to abject shame.

Hasn't that boat sailed? Are there really domain opportunities this side of the dot com boom? You'd better believe it.

This article argues that it's time to hold domains as part of a balanced investment portfolio.


Don't domains need sites on them to make money?

A domain can be "parked" with a registrar for no fee at all and there's no subsequent work required of the domain owner. Users visit the parked domain either because they're following a link from somewhere or have guessed at a URL. They may want a tree doctor in LA so try LAtreedoctor.com. When they land on the parked page there's little or no content but lots of ads for local tree doctor services. Each click generates revenue which is shared with the owner of the domain.

The share of revenue on this particular domain may not be huge but the domain itself is available as of right now (March 2007) and it can be had for as little as $5 (UK and a few other ccTLDs may cost a few dollars more). That price covers registration for the first year and is a cost that recurs every year but payable several years in advance if you prefer. The key question is: Will it generate any clicks? The good news is that it costs nothing to try. Really! You can try any new dot com free for five days to see if it does make money, and drop it if it doesn't!

If the $5 (per year) domain generates even as little as 85 cents a month that's a return of over 100%, every single year, phenomenal by any standards!

Multiply that by a few thousand domains and it starts to make serious sense. That's why iREIT, for example, spent 6,000,000 on domains in a single quarter last year and Marchex spent $164 million acquiring a single company's domain collection.
 

And there's the Secondary, or pre-owned, market

For users not keen on using tools to come up with new domain ideas and/or not anxious to auto-try thousands of domains to find the ones that get visitors, the secondary market provides the ideal opportunity to put together a profitable domain portfolio with less of the risks. 

Domains are actively traded on forums like these. For a parked domain (or domain portfolio) prices are often a multiple of what the domain (or portfolio) earns and is usually about 12 months' to 24 months' worth of net income. Transactions are normally completed safely.

The advantage with a parked domain is that you are buying a mini-business with a proven history. And paying a ridiculous, mind-bogglingly unbelievable P/E of 1. That's almost like theft!
 

The lottery factor

With new domains there's always a chance that a $5.00 domain can turn out to be worth a fair bit more. Even if it doesn't fetch the $7.5 million reached by business.com or the $14 million paid for sex.com thousands of domains demand prices in excess of $10,000 each year, and sell. Every single one of them was originally bought for $5 or thereabouts.

Note: By its nature the secondary market almost never produces such windfall opportunities. Most premium domains being resold have their appeal already factored into the asking price. The exceptions are expired domains. Expired or drop-catch domains generally have a good flow of traffic from the previous owner's efforts and are often great investment opportunities. (Finding drop-catches)

Most "premium" domains end up featuring sites/businesses that can be branded and promoted. These domains aren't the focus of this article.
 

The unknown collectible

Interest in collectibles as a form of alternate investment has seen a sharp increase over recent years (article). All sectors of the collectible market have seen a resurgence in demand, from sculptures to rare wines to stamps and autographs. Except domains. For some reason investors just don't seem to know about them. The ones that do may dismiss these as too "techie". Yet, the technical knowledge required to buy, own and profit from these investments is less than that required to buy stocks! (All the basics are covered on this very page and, for the keen researcher, there are links here to further information.)

 

Domains vs Other Assets


An investment of $100 in domains in 1997 (see image) would be worth in excess of $400 today. What's noteworthy is that they've outperformed stocks and shares and did it during a bullish period of strong FTSE and DOW growth. Over the last few years properties in the US and UK have appreciated at an unprecedented rate prompting many commentators to call a bubble in the housing market. Bricks and mortar properties have more than doubled in value during this time. Yet an investment in domains 10 years ago would be worth nearly twice as much as a similar investment in property.

Is it time to sell residential property and buy domains?

When city commentators are turning bearish on asset prices in general, analysts are calling the top of the stock market, the enormity of Yen Carry Trades threatens to send shockwaves through world markets, the complications of hedge funds promise international disasters and house prices are "unsustainable" ... domains offer a way out.

Are domains immune from a collapse in asset prices? Probably not. But they are likely to be affected far less if they are affected at all. Here's the reasoning: First, they are often referred to as internet properties but they share more traits with businesses than they do with real estate. Like businesses they earn revenue and are valued based on the likely future revenue streams. Prices are often quoted as multiples of revenue. Properties, on the other hand, do rely a lot more on market sentiment. During a downturn, however, parked domains can suffer from lower advertiser budgets and this can depress earnings and affect sale price.

 

Collect domains, they're more fun than stamps
(and they make a damn site - sorry! - more money)

The ain't making land no more. They are not making dot coms either.

<Note: Caution against getting carried away. Remember 2000?>

Liquidity:

Sure, there are domain buyers and sellers. And domain markets and auctions. But no recognition of domains being a valid alternative investment. I'm talking about the buying of domains/domain portfolios to holding within an investment basket. I'm talking about considering domains when spreading your investment risk across different asset classes.

I will make a case here that they are as valid as an investment as Stanley Gibbons' Rare Stamp Investment Fund, if not more. And they are ignored by mainstream investors for one simple reason: The average investor doesn't understand them and that exposes an opportunity waiting to be exploited.

Investing directly in stamps requires a great deal of knowledge as most stamps are completely worthless, even really, really old ones. Among the ones that have value most are worth under $50 making the entire task of managing the investment so time consuming it's out of the realms of sensible investment. That's why investing in this asset class is best done through a vehicle like an investment fund. No so with domains. You can hold it yourself. Domains don't require safes and don't attract a premium on insurance policies. The really attractive feature, though, is that you don't pay an investment fund a management fee. These sometimes exceed 2% of the investment itself.

Bundle the money making domains into neat little portfolios of  and it really is a sellers' market. The bigger players are chomping at the leash to buy quality portfolio and are paying hefty premiums for the best ones. They don't even have to be huge collections of 1.8 million domain names like this one.

 

It's not all for the big boys

You may not have heard of a company called Internet REIT, Inc (commonly referred to as iREIT) but in a single quarter in 2006 they spent 6,000,000 buying domains.

 

 

True, you can absolve yourself of all involvement and use a third party like iReit (read article)

<Explain about kiting for those who don't want to be stuck with a domain that's not earning>

Domains vs stocks

Guide to domain investing

 

 

Stanley Gibbons, the world's leading philately experts - listed on AIM - even have a Rare Stamp Investment Fund.

Stamps have performed well over time. The Royal Philatelic Collection is estimated to be worth in excess of 400 million and is easily the queen's largest single asset (source). But rare stamps are, er, rare (only 0.00426% of Stanley Gibbons' collection of 3,000,000 is "investment grade").

 

Downsides: The domain renewal fee. Aha! But the buying price of the domain was calculated on its net earnings - that excluded hosting/parking fees and annual domain renewal charges.

A good reason for investing in rare stamps is as a hedge against inflation. They appreciate in line with general economic growth. 

 

Other benefits

Why stamps? Why not invest the money in an AIM company and save 40% in tax?

In the UK investments in AIM companies are free of inheritance tax (IHT) under a scheme called Business Property Relief. IHT typically comprises 40% of a deceased estate that exceeds a threshold of 285,000 (circa $560,000); a threshold that is determined by the chancellor in his annual budget.

IHT, though, is not a problem on everybody's mind. Are there other benefits to going the AIM route? In addition to the saving in IHT there is potential to make substantial gains in the core investment. Unlike established, blue-chip companies, AIM companies can often soar in value over night. More good news: After the qualifying period when the value of your portfolio doubles or triples your capital gains tax falls to a meagre 10%.

No brainer? Yes, except that AIM shares can fall, you could lose your entire investment and you're more likely to see that happening here in AIM than in the main index. Startup companies are far more likely to fail than established ones.


How to transfer a domain | Where to buy a domain