Domain Name Investing 101: Online Real Estate as an Asset Class
I’m always searching for new ways to make money and regular reader, Joel (aka CreditCardChaser) provides some very unique insights on a new asset class, domain names! I remember back in 2000, Korea.com was sold for $5 million bucks to the government and I thought gosh dang! After reading this article, hopefully we’ll all have our own success in something so potentially lucrative. Enjoy! Sam-urai
Chances are that when you read the term “domain name investing” you immediately have the following questions pop up:
- Umm [insert embarrassed pause here], what exactly is a domain name anyway? Do you mean like a website? (No)
- What in the world is domain name investing and why should I care?
- How would I go about investing in domain names in the first place?
My goals for this article are to show you that: A) Domain names have inherent value B) Domain names can potentially be a great asset class to invest in and C) Give you some practical guidance on how the domain name investing process works.
Domain Name Definition
OK, let’s just get this out of the way to clear the air because I would venture that if we were talking in person then right about now would be the time where the nerd (me) would ask the question, “You know what a domain name is, right?” and there would be that very quick answer of, “Yes, of course – who doesn’t?” followed by that awkward please-don’t-call-my-bluff pregnant pause that nerds like me often receive when talking about “nerdy” tech stuff (but we often overlook of course because we are either too socially inept to catch on or we are just too enthused with talking about whatever nerdy stuff we happen to be talking about :) ). So whether you know exactly what a domain name is or you just have a very fuzzy understanding of what a domain name is let’s just pretend that you instead responded to my question with, “Umm, I am not exactly sure what a domain name is – I think I know but maybe you better just make sure we are on the same page…” I’m glad you asked: :)
According to Wikipedia: “A domain name is an identification label that defines a realm of administrative autonomy, authority, or control in the Internet, based on the Domain Name System (DNS).”
According to my recent FAQ “What is a domain name?“: “A domain name is used to make it easy for people to find web pages on the Internet. The Domain Name System converts domain names (such as Google.com or MSN.com or our domain name of DomainSuperstar.com) into IP Addresses (numbers in the format of 188.8.131.52 or something similar) so that when someone wants to visit a particular web site they do not have to remember a long string of numbers but rather just type in an easy to remember name.”
Practically speaking, FinancialSamurai.com is the domain name for this website. It is important to make the distinction between the words, code, files, databases, images, etc. that make up the Financial Samurai website and the location/address of the Financial Samurai website which is the domain name FinancialSamurai.com. One can own a domain name without having a website but if one has a website and the website is online for the world to see then the website owner must have a domain name (or use the domain name of a 3rd party – for example, some bloggers have blogs on the wordpress.com or blogspot.com domain name that end up as a subdomain that look something like joelscoolblog.wordpress.com or joelscoolblog.blogspot.com).
Why Invest in Domain Names?
Just like Financial Samurai very astutely preaches the benefits of crafting a comprehensive strategy for your investments it is also important to sometimes consider alternative asset classes outside of the typical stocks and bonds.
Here are some reasons why I own approximately 1,000 domain names and why they very well might be an asset class that you should consider paying attention to as a component of your diversified investment portfolio:
- Uniqueness – Every single domain name is unique and therefore has inherent value. For example, there is only one and can only ever be one FinancialSamurai.com, Cars.com, Hotels.com, etc. Since each domain name is unique then there is great opportunity for value creation because unlike the tulip bubble of the 17th century where tulip prices deviated wildly in excess of the actual quite equally low inherent value of the tulip bulbs themselves each domain name has vastly different intrinsic values. I could go into great detail on this but I think that we could all agree (Financial Samurai included) that the domain names Cars.com and Hotels.com have a much much much greater intrinsic value than the domain name FinancialSamurai.com or CreditCardChaser.com).
- Cost - Registering a domain name is cheap – very cheap. The cost of domain name registration is around $7 to $10 annually. Of course, buying a domain name from a 3rd party could cost any amount of money that you and the other party agree on but the actual ongoing required annual registration fees are very small. (Tip: The term “hand registering” refers to finding a domain name that no one else is currently paying the registration fees for and grabbing that domain name for yourself by paying the registration fees to a domain name registrar like a GoDaddy although the term “buying domain names” can be used to describe the hand registration process OR the process of buying a domain name from a 3rd party either through a private seller or through a domain name auction – typically buying a domain name from a 3rd party is handled either through an escrow service like Escrow.com or directly though the domain name auction aftermarket and its as simple as making payment and then transferring the domain name from the sellers account at their registrar to your your account at your registrar).
- Internet - The Internet is a large and growing market. If you think of domain names as the online real estate of the Internet then as the Internet continues to grow in popularity and become more and more a part of our daily lives then domain names as the online real estate of the Internet will continue to increase in value as well.
- Utility – Just like certain asset classes like orange juice futures or soy beans or pork bellies all are real asset classes with real tangible utility I believe that domain names have real tangible utility as well. While you can drink orange juice and eat soy beans and eat pork bellies (hopefully cooked first as eating raw soybeans is toxic and eating raw pork bellies just..well..gross :) ) you cannot eat or drink domain names but there are different outside factors that influence what we can do with domain names. For example, type in traffic contributes to the foundational utility of a domain name (type in traffic is traffic that comes from people typing a domain name directly into their URL bar and arriving at the domain name as opposed to using a search engine or clicking on a link or using a bookmark. What is really cool is that a significant portion of Internet users will type a name directly into their URL bar without even knowing what the site is or if it even exists because the perception is that if one wants information on “hotels” then what better domain to go visit then hotels.com or if one wants information on “cars” then then cars.com etc.One example of a domain name from my domain name portfolio that gets type in traffic is the generic keyword domain CaliforniaCarInsurance.com so when people are looking for information on finding “California car insurance” then a significant number of web users will simply type in the URL CaliforniaCarInsurance.com – whether they have ever been to the site before or not) as does the aforementioned uniqueness as does keywords in the domain name and ease of branding (you definitely remembered the “Financial Samurai” brand a little easier than “John Smith’s Finance Blog” that you read last week right? Or was it “Joe Smith’s Finance Blog”? :) ) as does these other 25 criteria that go into choosing a good domain name.
- Strategies – There are many strategies for creating wealth with a domain name. You can A) Buy a domain name for X price and hope to flip it for X+ price (either a short term flip or a long term flip – think “daytrading” vs. “buy and hold” as the stock investment analogy or B) Buy a domain name and develop it by building a website on it that will make you money (my personal favorite strategy) C) Buy a domain name and just “park” the domain name so that it just shows advertisements on the domain name that make you money when people type in your domain name (again this illustrates the value of type in traffic) and click on your ads or any other number of domain name investing strategies.
How to Invest in Domain Names
Learning how to make money as a domainer (a domainer is someone who buys and sells domain names or invests in domain names and monetizes domain names) is not something that can be covered comprehensively in a paragraph or two let alone an article or two but a few quick things to keep in mind is that you should stick with niches that you know and that you should really do your homework before making any big purchases.
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If you have specialized knowledge about football or knitting or IRA’s then you like have an advantage over others without your specialized knowledge when it comes to spotting valuable domain names in that niche.
Sure, it only costs $7 – $10 to hand register a domain name but before you ever decide to make any kind of sizable monetary investment into a domain name then you should do your homework by first reading things like the 25 rules for choosing a good domain name so that you can understand some of the criteria for evaluating what makes a domain name valuable and even more importantly learn some of the mistakes to avoid (such as registering domain names with trademarked terms in them – a big no no).
Domain name investing is not for everyone but if I can tell you from personal experience that investing in domain names is a potentially very profitable and rewarding experience and if you have somewhat of a nerdy streak like me then it can also be quite a bit of fun!
What questions do you have about domain name investing?
BONUS #1: 10 of the Most Expensive Domain Names Ever Sold (I could be missing a few)
- Sex.com $14,000,000
- Fund.com $9,999,950
- Porn.com $9,500,000
- Business.com $7,500,000
- Diamonds.com $7,500,000
- Beer.com $7,000,000
- AsSeenOnTV.com $5,100,000
- Korea.com $5,000,000
- Casino.com $5,500,000
- Toys.com $5,100,000
BONUS #2: 10 Highest Reported Domain Sales of 2009 (Source: DN Journal)
- Toys.com $5,100,000
- Candy.com $3,000,000 (+ revenue share)
- Fly.com $1,760,000
- Auction.com $1,700,000
- Ticket.com $1,525,000
- Call.com $1,100,000
- Webcam.com $1,020,000
- Server.com $770,000
- Luck.com $675,000
- Exterminator.com $600,000 / Christian.com $600,000 (tie)
Thanks! – Joel
About the Author: Joel is a CFP® and a web entrepreneur that loves domain names, the Internet, building websites, and all things geeky and Internet related. Some of his recent projects include building consumer websites for finding credit cards and comparing car insurance.