I have purchased a few income producing websites in the past, and have dabbled in the idea of investing again, but come to the question. Is buying a website a good investment?
With an understanding of SEO and marketing, buying a website can offer a great return and be a great platform to build off of. However, there are many pitfalls that could cause bad outcomes.
I love the concept that buying a website is a great way to get a head start on building an online business. If I am interested in building a niche website, and have plenty of content ideas for it, by buying an already established website, I could take 6-8 months off of the time it takes to see results.
There is also the ability to leverage the trust the website has already earned over time.
One great benefit of purchasing an income producing website over many other investments is the level of control you have over it. Not only that, but how easy many changes can be.
To contrast with real estate, you have a lot of control over your asset. Though to make changes you often have to get permits and approval from the city, and the changes are often very slow and expensive to implement.
If you want to write a bunch of great content to add to the site, you are free to do that. Want to hire a writer to publish a bunch of content? You can do that too. Want to hire an editor to clean up the articles that are on the site so they are higher quality? You guessed it, you can do that too.
This is a double edged sword though. You are not only in control of the website, but you are responsible for its stewardship.
What is the Upside?
The market for income producing websites has been trending towards for the past 20 years. Not only has the total market, number of sites, size of sites all grown but the valuation has gone up as well. This is a trend that will likely continue.
For instance, sites used to trade at 5-10 months multiple of their net income. Now, 30-60 months seems to be the norm. If this trend continues, simply holding onto a website for a few years could give you an upside return on sale. Plus you will be receiving profit during the months you held it.
At 60 months valuation that means a website making $1,000 a month would cost $60,000. That is a 20% annual return on cash invested. In most asset classes, that would be a great return.
The upside potential doesn't stop at just continuing on the present profit either.
The best websites to buy are ones that you can identify a strategy on how to improve them.
If you can improve the website, you can improve it's income producing potential. This also improves the potential price it would be worth if you decided to sell it.
What are the Risks?
There are many risks when buying an income producing website. This is probably the biggest issue with this asset class. The internet is inheirently fast paced. Most websites rely on a small set of factors for their traffic and for their income.
The operations of websites have more moving parts than some other assets like real estate. Though they are much less complicated than the inner workings of many businesses that people buy stock in.
There is a professional management team in place to try to navigate the complexities of large businesses. With an income producing website, you are in charge of the management.
- The site can lose its ranking and traffic.
- You could get scammed and buy something without the traffic and revenue you thought
- Other sites could out compete yours and get better traffic
- The content can get stale over time
- You could fail to understand what makes the site perform over time
- Most websites are very dependant on their traffic from Google
You Need a Specific Skillset
While not quite the same skillset that Liam Neeson has, there is a skillset that is required to properly underwrite, manage, and grow a web asset.
You need to be able to understand SEO and forms of web traffic enough to know why a site is getting the traffic it is getting, and if it is a stable base.
You need to know what it takes to create more content for the website and grow it over time.
Some websites have processes that must be managed for sales and customer support.
Other asset classes also require specific skillsets to be able to mitigate some of the risks. Many people are ok ignoring that skillset and invest in stocks anyways.
How Are Income Producing Websites Valued?
Income producing websites are valued with concepts similar to commercial real estate. The income is divided by the cap rate, or discount rate, to determine the value. That is the underlying concept, but no one really talks about it.
The income producing website industry talks about the value in the format of multiples. This means how many months of net income it will take to earn back the principal.
For instance, a site with $1,000 of income sold at a multiple of 40x would cost $40,000 to buy.
At the time of writing, quality sites are trading around a multiple of 40x.
To account for risk and quality, a site with less percieved risk, or more percieved growth factor would be valued at a higher multiple. A site with lower quality or a questionably future would be expected to trade for a lower multiple.
Where do I find Websites to Buy?
Much like with real estate, you can find websites to buy "on the market" through brokers or off market.
Buying through a broker, you will usually be paying a premium for the fact that the site was brought to market, was usually groomed for sale, and you are competing with others on the purchase.
That being said, you can comb through more sites that are for sale quickly and look for opportunities.
Top Website Brokers
- Empire Flippers: My favorite. They do a good amount of due dilligence on the properties, and have many that are built in a way that I find relevant to purchase.
- Flippa: This site is a bit like the wild west. There are some great opportunities on this site, but tons of sites with less sustainable business models to say the least.
- FE International: This site does the most vetting of properties for sale of the three mentioned brokers. Most of their listings are in the 6 and 7 figure range.
Finding Off Market Deals
The basic concept of finding an off market deal is to identify a website you would like to buy, and contacting the owner to see if they are intersted in selling.
It is similar to wholesaling in real estate. One of the primary differences though, is you are not contacting people and asking to buy their home, where their family lives. But in a way, you may be asking to buy where their mind lives.
There is potential to get a better deal by buying websites off market. While dealing privately off market, you can technically get a property for a much much better revenue multiple. I do not think this is the main reason to buy off market.
When someone goes to sell a website, there is incentive to do shorter term things to get traffic and income. If you approach someone that has not been focusing on selling it, there is a better chance they have not done anything to manipulate short term traffic or revenue.
There is a great potential to find low hanging fruit. People that are selling a website on a broker are usually going to do some basics to optimize their site, or bring them up to date. However, you could technically buy a website that has great content but is out of date and a simple update could vastly improve performance.
How Do I Pick Which Website to Buy?
As with most forms of investing, everyone's goals are slightly different, and that will drive different strategies.
My strategy is to look for websites with stable traffic and a bunch of really high quality content. In contrast, I am not looking for a website that somehow got a bunch of traffic through link schemes to a bunch of articles that are not worth reading.
I am looking for websites where I can add value. I want to be able to identify some problems with the website, that upon ownership I can quickly change and immediately benefit from.
I am also looking for websites that I will be able to build onto. Either with subject matter knowledge, or at minimum something I will be able to research and write about on a regular basis for a few years to come.
How do I Verify The Website is not Spam?
It is important you understand how websites get traffic, and how it is grown over time. This will help you in identifying when something doesn't look like it was grown organically.
You can use SEO tools to verify a site's rankings on Google and then cross reference it with what they are saying the site is recieving.
When you get further on in the vetting process, you should be able to get access to their google analytics and get verified reports of income.
One thing you want to watch out for is sites that use spammy techniques to get traffic and rankings. Look for backlink profiles that do not look organic. There are really different grades of backlinks. Ones that occured naturally because they are citing great content. Ones that appear natural, because the site owner reached out and made the link happen one way or another. Ones that come from mutual benefit like guest blogging. Then there is straight up spam, link farming, and private blog networks (PBN's)
Wrapping It Up
Buying an income producing website can definitely be scary to someone who has never done it before.
While it has the potential to be a great investment and addition to someone's overall investing strategy, there are pitfalls and risks to look out for. It is not an asset class that is for everyone, and requires a certain skillset and temperment to be a successful website investor.