Many people call websites “Digital Real Estate”. To some, this may just be a clever name or witty reference to a website as an online “home”, or a domain name as a tradeable asset.
To others, the reference is a lot more accurate, especially from an investing point of view; real estate generates cash flow and can be sold for large gains. The same is true of websites.
But how far does the comparison actually go? What are the similarities and key differences between the long established assets of real estate vs the emerging asset class of websites?
That’s what we’re going to explore in this post.
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I’ll admit that I’m aware real estate can be nuanced and varies depending on country, strategy, and individual investor.
I’ve had input on this article from an experienced real estate investor in the UK – and while some of the numbers and details will differ internationally, the broad concepts are similar enough for you to understand the difference between the two asset classes wherever you live.
Here are some of the things we’re going to cover:
- Surface-level differences between real estate and websites
- High level numbers – what kind of ROI is common
- Achieving those numbers – what factors contribute
- Operations – running a real estate business vs websites
- Stability, diversification & risk
- Capital requirements and entry levels
- Leverage, debt and loans,
At A Glance: What Are The Fundamental Similarities And Differences?
Let’s start with the most obvious similarities.
In both real estate and websites, you collect income, and then can sell the assets later for a multiple of that income.
Equally, you can buy “fixer uppers” to flip or hold, and you can buy established, stable properties with solid fundamentals.
Websites and real estate may earn their income differently, but they offer the same kind of arrangement.
What about some of the more fundamental differences?
With real estate, in many countries you’re not going to get double-digit returns unless you use debt. You may be able to cite an example that proves me wrong (and feel free to do so), but that will most likely be the exception rather than the norm.
That’s not the case with websites, where you would be chasing much higher returns for much less capital.
Real estate is safer though. You’re not as much at the mercy of a Google update or social media algorithm that could wipe out your income.
Operations are different too. Websites are a little bit more technical (though not as much as you’d think), but don’t have to deal with tenants or repairs.
A website that is earning well can generally be maintained with a minimum effort. It’s not fully passive, but it’s not a daily job either.
That said, many people want websites to grow their income, which can involve a full time job in the way that any other business needs full time workers to grow its revenues.
A website is somewhat of a hybrid between an online business and online real estate. This does leave a lot of room for upside too.
This also depends on the type of website. Is it an eCommerce website with customer support and physical inventory? Or a simpler content website, which can be thought of as more like a publishing business.
What Kind Of Returns Can You Get?
As mentioned, with real estate you can achieve double-digit returns if you use debt.
Websites on the other hand can achieve significantly higher returns.
Let’s take the current average website purchase multiple, around 2.5 x annual net profit, or 30x monthly.
With this multiple, even if you don’t grow a website, you can achieve a whopping 40% annual ROI.
If you can 2x the website’s income over the course of a year though, that ROI skyrockets further.
This 40% number isn’t far fetched either, it’s based on the current market price of purchasing a website off a broker. It’s the norm.
Check out the EmpireFlippers Scoreboard, which tracks market averages over the past 12 months.
You have to be doing exceptionally well to be consistently finding 40% returns in real estate.
So this is the real difference between the two asset classes, and why so much money is coming into the website space.
The search for yield is an increasing problem across asset classes, even the hedge fund industry is struggling. Websites represent a legitimate answer for many investors learning about the space.
What Factors Contribute To Achieving This ROI?
When considering the potential ROI, you have to also consider what factors can help you or hinder you achieving it. What scares most newcomer website investors away from the space is the belief that while 40% is possible, it’s not possible for them.
What do you have to do in offline real estate and its online cousin, in order to hit these numbers?
While real estate can appreciate, that price increase is out of your hands, and without the appreciation, your ROI is low. The real art to finding a great real estate investment is picking an area where appreciation is more likely than not, or even picking an investment that is under valued already.
With websites, you don’t even need the growth to get great returns, but you can achieve growth a large amount of the time too.
You really can consider growth as pure upside, rather than the sole reason to invest.
This is an important point, because growth isn’t guaranteed, and the search for growth opportunities can lead you to websites with more risk. Smaller websites with less history, broken websites, previously penalized websites, all of these have much more opportunity to grow, but could also die just as quickly.
You can choose a website that could go up 100% in a year, but could also go down 50%, or you could choose a website that might go up 20% in a year but is only likely to go down 20% as well.
The key is that in either case (and I lean strongly towards the latter), you can still do well.
High ROI is not predicated on asset appreciation. Let’s just say it that way.
What factors can screw you up in real estate though? Aside from a market tanking, a house failing to appreciate, you don’t have much risk. Sure, a house could turn out to need a lot more work that you thought, or the neighborhood could turn out to become less popular, or a tenant could become a nightmare, but it’s unlikely a real estate investment ever completely goes to zero.
With websites, while we’ve established you don’t necessarily need them to grow, you do have to consider the fact that they could die, or reduce significantly in value.
A google algorithm change, an Amazon affiliate commission re-structure, a social media ban, all of these things can severely hurt your website (and all of these things have happened historically).
I’ve shared some case studies previously about some things that can go wrong, and I’d recommend you read them to be aware of some of those risks.
As an aside, the website that ‘went wrong’ still pays me a decent 10-15% per year, but its value has dropped to the point where selling it would be a painful loss.
I believe this is also another reason people want to grow sites. Firstly, it reduces the payback period and the risk, and secondly, it gives you more room for things to go wrong.
There’s a belief that the longer you hold a site, the more chance of something going wrong.
As we learned in Fight club, on a long enough timeline, the survival rate for everyone drops to zero.
That doesn’t mean we should try to sell as quickly as possible though.
My argument is that this is predominantly only the case if you hold risky sites, but it’s still something to consider.
Website Operations – Passive Income Right?
For this section, we’re going to focus on website operations, because most people already understand what it’s like dealing with real estate (tenants and maintenance!).
There’s long been a perception that websites provide you passive income. This probably explains why people also expect websites to die the longer they
hold neglect them.
Websites can definitely provide a fantastic income disproportionate to the amount of work required (especially once they’re established and earning already), but they’re not fully passive.
You can run a website for a few hours a week and maintain it, or you can put more effort in and grow it.
The real question is, what is that work like? How accessible is it to a first-time investor? And most importantly, do options exist to delegate the management as with real estate?
The work itself can range from small, less important, but nuanced (such as identifying which blog comments to reply to), all the way to much more technical (such as migrating a website and changing affiliate links).
There are definitely case studies out there of people who bought a website, didn’t know what they were doing, and watched it slowly die.
Frankly, it’s not something a first timer will excel at, which is why our service is so popular, and why there is a growing demand from investors for people to help them run the businesses they buy.
This is again, pretty similar to the real estate world, where property managers and management companies are common, and widely used by investors, both novice and expert alike.
Stability, Diversification & Risk
I’ve talked some already about risk and diversification. When it comes to a comparison with real estate, websites are definitely riskier (but are they risky enough to negate the huge returns?), but they’re also a little bit easier to diversify, since they’re less cash intensive.
Additionally, you don’t need to use debt to buy websites, so there’s less risk of becoming over leveraged.
That said, it’s worth pointing out that if you wanted to buy a $100k website, you’d need to pay $100k cash. That same $100k could potentially buy you 4x $100k houses using debt (ignoring taxes and fees at this point).
It is actually harder to get leverage in the first place for websites, which others will consider a risk or opportunity cost in itself. You also don’t get the benefits of remortgaging, which means there’s no benefit to being on a website “ladder” as such.
The real way to win with websites then, is to find a way to diversify your portfolio without sacrificing gains in the process. Fortunately, I’ve written a few posts about this already, which you can read here:
- 1.) Can You Increase Returns While Minimizing Risk?
- 2.) How To Reduce Costs And Improve Results While Diversifying
How much risk actually exists with owning one website?
It depends who you ask, how long they’ve been in this business, and most importantly, how they approach due diligence. I’ve shared in previous posts some of my own failures, and I’ve since built those lessons into my processes.
The risk is very real that a website could lose value. Among other things, the major events that could cause a website to decline could be:
- A Google algorithm update causes a loss of traffic
- A social network update could have similar results
- Competing websites overtake your rankings in Google (separate from an update)
- A product you promote as an affiliate could stop trading, could cancel its affiliate program, or reduce its commissions. Or it could stop converting to your audience.
There are a few other concerns as well, but these are the major ones. What’s worse, some of these factors are outside your control.
This is why it’s important to diversify (in case I haven’t made that clear yet), and important to conduct proper due diligence, which assesses the inherent risks websites have. It’s another reason why people work with us, for example.
Going into all the details of risks and due diligence is beyond the scope of this article, but needless to say, websites ARE inherently riskier than real estate, but those risks can be mitigated a fair amount, certainly to the extent where it’s very much worth the risk:reward ratio.
Mindset & Skillset
One factor people never consider is the mental side of things. Some people may be terrified at the thought of tenants, while others are afraid of Google updates or a lack of control.
It may not be rational to be scared of one of these things and not the other (or neither, or both), but it also doesn’t make sense to invest in something you’re going to lose sleep over. You can learn to adapt to these fears and risks of course, which is why many people end up working with us to get their feet wet.
Similarly, your skillset will play into this as well. If you’re skilled at renovating houses, you can add a lot of value to the game here, and tip the balance in your favor.
Similarly, someone skilled at SEO or digital marketing can add value to a website investment where others can’t, or can mitigate risk significantly.
In our case, as well as the above skills, we also benefit from economy of scale, allowing us to reduce operational costs.
You can buy a website making $1,000 profit per month for anywhere from $25,000 to $35,000. While you could get into a $100k property for a similar spend, you get the cash returned a lot faster with websites, allowing you to reinvest it earlier.
With real estate, the yield is so much lower, that you only really make huge gains by seeing your property appreciate in value over a number of years.
Additionally, the capital requirements are much higher in real estate.
It is of course a lot easier to get access to capital for real estate purchases though, and by refinancing, you can do some pretty good things with real estate.
For example, say you put down $25k to buy a house for $100k. If you spend a further $10k on it and get it revalued at $150k, you can take out a larger mortgage and pull out all the money you’ve put in.
At that point, your ROI is infinite. It’s not an easy thing to do and there are some caveats, but it’s possible – which is why leverage (used sensibly) is one of the best things about property investment.
These options don’t really exist for websites, and perhaps never will.
Aside from an SBA loan (which isn’t always guaranteed to be approved and has fairly strict requirements), there are not many lenders out there willing to give you money to buy websites. Especially if you’re not somebody with a track record.
This is mostly because digital real estate is still an emerging asset class, that a lot of traditional lenders either don’t understand, don’t consider tangible, or simply don’t want to accept as collateral.
I do believe this is changing over time, but right now, it’s tough to raise debt for purchasing websites (although not impossible).
It’s also relatively risky to use debt for purchasing websites, unless you’re diversified well.
I think the most interesting aspect of all of this is how quickly people are becoming aware of the potential that digital assets hold, and the more heads that are turned, the quicker things tend to move.
This will come with both pros (better access to better deals, easier debt, better prices for sellers) and cons (more expensive websites, more competition), but ultimately is most likely going to be a net positive.
Taxes are something best left to tax professionals, so don’t take the following as tax or financial advice. It’s also going to vary widely depending on your tax residence.
That said, both real estate and websites can offer some attractive tax advantages. Real estate is fairly well known, but for websites, you can depreciate them over 3 years in many cases, which can count as significant tax savings.
As mentioned, I don’t want to talk too much on this subject, but for the sake of the comparison, let’s just say that both asset classes can offer some excellent tax advantages.
Conclusion – Is One Asset Class Better Than The Other?
This is a tough one to answer, as everybody has their own investing style and risk tolerance. Equally, people have different goals. Many people we work with are looking for wealth creation, while others are simply looking for above-average yield.
Some of you prefer to use debt and prefer to have lower risk, while others are keen to jump into a rapidly emerging asset class.
And the vast majority of you are probably keen to invest in both.
Ultimately it’s not for me to say which is better, although it is probably obvious from my writings which way I lean.
Hopefully the above information and thoughts will help you come to your own conclusions, of which I would love to hear in the comments below.