Buying A Website for the First Time on Flippa
Lately I’ve been getting very interested in buying real estate for several reasons. There are some decent triplex and 4-plex properties in my area that I could buy for about $150k and rent out for $500 per room x 4 rooms. Not only would I be able to generate some great cash flow but I’d be able to pay the mortgage off with the rent from just 1 of those tenants. Great deal right? The only problem is since I already own a home, I don’t qualify for a FHA loan that only requires 3.5% for the down payment. I’d need to come up with closer to 20%-30% and that’s before any repairs.
Websites – Like Online Real Estate
Niche websites as they’re often called, are little websites that promote content through advertising. Usually Google’s Adsense or Amazon’s affiliate program. The website I purchased cost a little over $2,000 and brings in roughly $50 per month through Amazon’s affiliate program.
The website recommends products and if someone clicks on a link that goes to Amazon and makes a purchase within 24 hours, I get about a 5% commission. So it’s similar to real estate in that you buy an established property for a pretty high up front cost, then you slowly recoup your investment over time.
Why Websites are Better than Real Estate
There are several reasons I chose to buy a website instead of an investment property. In no particular order:
- Don’t need to save up $40k – This would take quite a while to do. I do have a side business bringing in some income outside of my dayjob but it would probably take about 2 years to save up enough for a rental property. I have $2k in my business fund right now that I could immediately apply towards a website
- No leverage or lending required – If I get into rental properties I’m going to need to get another mortgage and it is going to be secured by my current house. So if something goes really sideways (not sure what, maybe lawsuit or radon in the house; something crazy) I’d probably be facing some pretty big financial challenges I’d rather not take on yet.
- Maximum loss is known – The most I can lose is the cost of the website. Say I did save up $40k as a downpayment on a rental property then paid the inspection costs, closing costs, etc. I may be on the hook for a $5k or $10k repair just months after purchase. Then after all of that time and money, maybe 2 of my tenants move out and my cashflow goes from positive to negative while I wait for new tenants to move in.
- Solid deal – Deal probably isn’t the right word. I overpaid for this website but I was OK with it for a few reasons. Most websites sell for 20x monthly earnings. This website had a very long track record, more than 3 years of traffic, and was consistently earning $50 per month. It also had zero backlinks which means Google is ranking this site and sending it traffic solely based on it’s content, which really wasn’t that great to begin with. So I ended up paying a little over 40x earnings, almost 50x. The reason for that is I think I can significantly fix up the design of the website and add some social media (this site has a huge opportunity on Instagram) to get the earnings up. I don’t think it’s unreasonable to get up to $100 per month within the next few months. So if I’m at $100 per month, I’m closer to that 20x-25x multiple which is more reasonable. The problem with most websites under $20k is that they’re usually scammy pieces of crap. Go to Flippa right now and look at what is for sale under $5k. 99% of the listings are junk and would be a guaranteed way to lose your money. I’ve wanted to get started in buying and selling web properties for a long time so the difference between paying $1k and $2k didn’t matter as much to me since I just needed to get going and start learning.
- The Multiple Rule – In the point above I mentioned how websites sell for 20x earnings. So if your website earns $1k per month it is easily worth $20k. If you can increase the monthly earnings by another $1k, you’ve increased the value of the site from $20k to $40k. This gives you great leverage on the upside. Instead of increasing the earnings and sitting and waiting, I can increase earnings and immediately flip the website for a significant ROI.
Cons of Buying a Website
But it’s not all roses. There are some very significant risks when you buy a website compared to a rental property.
- Could disappear any time – Google is pretty famous in the online communities for their heavy handed smackdowns of websites they decide to penalize. When Google releases a huge update (see Panda or Penguin for past updates), websites that get penalized usually see a 90% or higher drop in traffic. This basically kills your website. However, the website I bought has no links to it and doesn’t seem to be doing anything shady going on. The risk of a Google penalty never really goes away, but as far as I can tell the website I purchased has everything on the up and up and shouldn’t face too much risk in this area.
- Due Diligence is Much Harder – This is my first time buying a website and I didn’t really have a clue what I was doing. When I bought my first home I didn’t know what I was doing either but I could pay a home inspector $400 to check it out and let me know if I was going to get screwed. Now you can find buyers agents for web properties. The problem is if you’re buying a website for less than $10k it doesn’t really make sense to do that because the costs of the agent will be so high it will destroy the deal you are getting on the website. Without any due diligence help, I basically just looked on Google and Reddit and tried to find as many stories as I possibly could that related to buying websites. I also bought the website from someone with a very good track record and positive reviews. The seller was a great person who held my hand through the process and seemed like a genuinely trustworthy guy.
- It’s work – If you buy a rental property you can hire a property management company to run it. You can hire contractors to do repairs and upgrades. Real Estate is very hands off (if you want it to be) so you don’t have to sacrifice much time to run your investment properties. Websites are a little different. In order to increase earnings I need to add more content which means hours spent researching and writing articles. I also need to figure out how to optimize the design which means adding features and testing how they work. I don’t know how to do this (yet) but in the past I’ve been able to learn WordPress without much issue so I feel pretty comfortable I can improve the website I bought. You can hire people to write articles for you but it is very difficult to find quality authors and if you do find one, they will be expensive. After all, would you write boring product review articles if you were a great writer? Probably not. And if you did, you’d charge a LOT for them. So with a website that makes a max of $50 per month right now, I just can’t afford to pay $50 or more for every new article I want to add. That means I’ll be slugging it out on my own and spending the time to do all of the content work at least until earnings get up to the $500 or more area which will probably be quite a while from now.
I’ll try to keep updates going on this website experiment. It seems like a lot of people buy a website online and are able to instantly and effortlessly improve it and bring the earnings up. I think it’s going to be a little harder for me to do that since it’s my first website and this site is fairly small. Only about 500 visitors per month and $50 in earnings. Hopefully I can use the lessons I learn from this purchase to improve my web skills and buy larger, more profitable properties in the future.