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:

  1. Umm [insert embarrassed pause here], what exactly is a domain name anyway? Do you mean like a website? (No)
  2. What in the world is domain name investing and why should I care?
  3. 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 11.222.33.44 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:

  1. 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).
  2. 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).
  3. 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.
  4. 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.
  5. 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.
- Show quoted text -

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)

  1. Sex.com $14,000,000
  2. Fund.com $9,999,950
  3. Porn.com $9,500,000
  4. Business.com $7,500,000
  5. Diamonds.com $7,500,000
  6. Beer.com $7,000,000
  7. AsSeenOnTV.com $5,100,000
  8. Korea.com $5,000,000
  9. Casino.com $5,500,000
  10. Toys.com $5,100,000

BONUS #2: 10 Highest Reported Domain Sales of 2009 (Source: DN Journal)

  1. Toys.com $5,100,000
  2. Candy.com $3,000,000 (+ revenue share)
  3. Fly.com $1,760,000
  4. Auction.com $1,700,000
  5. Ticket.com $1,525,000
  6. Call.com $1,100,000
  7. Webcam.com $1,020,000
  8. Server.com $770,000
  9. Luck.com $675,000
  10. 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.

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

Subscribe To Private Newsletter

Comments

    • says

      Joel – Gotcha. It makes you wonder though, if the spammers etc are really targeting credit card users, that must mean there is a ton of money to be made in the space, but at whose expense?

  1. says

    @admin

    There is also a lot of money to be made in selling vitamins, diapers, and viagra. Just because there is a lot of money to be made in anyone area that does not mean that it has to be made at someone else’s “expense”. At least not if one truly believes in the capitalistic theory that both parties gain by the exchange. Certainly there are companies in any industry who do things unfair to consumers and hopefully that is something that we can both point out from our respective blogs when we see it! – Joel

    PS You know I was just dying to work in the word “viagra” somehow and trip your spam filters even more :)
    .-= Credit Card Chaser´s last blog ..Win $500 in the 2009 Credit Card Chaser Love/Hate Credit Cards Contest =-.

  2. says

    @LeanLifeCoach

    One of the best ways to get a lot of attention on your domains is to place them for sale on places like GoDaddy’s Auction platform, Afternic, or Sedo. Of course you will have to pay different commissions or fees but you will get your names in front of a lot of people looking to buy domain names.

    If you want to avoid paying any fees or commissions then you can contact potential buyers on your own but that can be pretty time intensive.

    I have never personally leased out a domain although I technically am leasing ~ 30 domains names myself in a lease to buy financing arrangement that I set up for some premium domains through a domain name financing company.
    .-= Credit Card Chaser´s last blog ..Win $500 in the 2009 Credit Card Chaser Love/Hate Credit Cards Contest =-.

  3. says

    Wow,

    As someone heavily involved in the domain name sales arena I have to congratulate both Joel and the Samurai here for such a great thread. Believe it or not this post has mor comments than 99% of all posts in the actual domaining world.

    Investing in domains is actually a huge business but collectively sees only a small growth from people outside of the sector every year. When I say small growth I mean people who really dive into this business and purely buy and sell domains. Lots of people buy domains with an intent to use them but as purely just an investment the amount of “new blood” in this industry is probably at a 5% growth rate.

    Every Tuesday weekly sales are reported by DNJournal which almost exceed well over $1,000,000 per week – and these are just reported sales. I know people who do over $500,000 a month in sales and never report a single one so the piece of the pie getting reported is far less than what actually sells.

    I will add that there are a few classes of domain names.

    One are the keyword domains Joel mentioned which have tremendous development value however the key is to understand what makes a good keyword set and this is where the opportunity lies to get great deals. Many traditional domain owners actually don’t understand the development world at all and many times price names that sound cool higher than ones which have a lot more productive value in terms of SEO and online commerce potential.

    How many of you think http://www.howtoloseweightfast.com is a great domain name?

    Some would say great – others would say too long – while even more would probably not like it because its more of a question than a brandable name.

    However the fact is according to Google the keyword set “how to lose weight fast” is the second highest search term for anything to do with weight loss.

    Many domain sellers price shorter names less than longer however sometimes the value is in the longer tail terms as well

    Secondly – we have 3 letter names – like AUD.com – These names are more collector names than anything else however investors should watch for trends as often its pretty easy to grab one for 3 or 4k and sell it for 10 only a week later. Most of the aftermarket buyers (on venues like SnapNames and NameJet) are still domain investors and everyone (well almost everyone) has a budget so lots of opportunities lie. Of course, if you intend to show ads on the name based on products which a company who has the same acronym trademarked you very likely will be sued so unlike buying a car one has to really understand trademark law when purchasing these types of names. You also have to use common sense. Are you buying a domain because its close to a cool company you like? .. If the answer is yes, then you buying this domain with the intent to capitalize on someone else’s trademark. Of course, someone has to prove this but heavy fines exist

    Then we have brandables – catchy names like nostringsattached.com or http://www.govote.com – names that have meaning and could very well be used as part of a branding campaign. At the end of the day these usually catch more but the supply of interested buyers is far less than development worth, keyword rich domains.

    I published an article here that sums up the state of domain market today vs. 10 years ago and may be of some value

    http://www.luxurynames.com/domain-valuation.html

    This asset class is one of the greatest finds out there but be careful. People who spend money recklessly and just buy names because they sound cool often end up with nothing less than a pile of renewal fees.

    Those who take some time to educate themselves and ask people for value opinions …. people who sell domains – not people who like domains … can do very well.

    • says

      Awesome insights Alan! Love your thoughts on short and long names, searcheable titles, and brand names.

      How much do you think http://www.howtoloseweightfast.com would sell for?

      I guess I’ve got several domain names myself and the two that are public are FinancialSamurai.com and Yakezie.com, which I guess would go in the brand name category.

      I just bought a couple names last night and will play around with them for a friend’s business.

      Thnx for stopping by!

  4. says

    Samurai,

    It’s hard to put a value on top domains.

    Howtoloseweightfast.com is worth anywhere between 20-100k in my book. It really depends on the buyer and this is the hardest part about domain valuation since unlike real estate you have a world of different buyers. From people who just flip domains to end users. Even the definition of an end user is debated long and hard.

    Is it just a company who specializes in the keywords of domain (i.e. weight loss company)?
    Is an end user a blogger like yourself who will use the name?
    Is an end user somebody who will create a 5 or 10 page site and throw some Adsense ads up?

    Typical “domainers” = people who purely buy and sell domains (you know those with the annoying ads) usually only define the elusive end user as a big corporation however its not the case. If I owned financialsamurai.com and sold it you and you created this blog you are an end user however quite likely an individual would only pay less than $5,000 for a name whereas a big company may pay $500k for the same name. Truly wide variance and that’s why valuations are tough.

    What any investor needs to pay particular attention to is the LIQUID Value of a domain name – otherwise it can be somewhat of a speculative game. Remember, the key word is LIQUID value. This is the single most important thing in domain investing as we are in a very ILLUQUID marketplace.

    Unless you have the contacts, understand where to sell names and what brokers to call for assistance its very hard to dump that $10,000 name on any given day. If you own stocks you simply put a sell order in and move on. Sure, you might lose a few bucks but nowhere near the amount you would lose if you didn’t know anyone and needed to trade in a $10,000 domain for cash today.

    I’ve seen $10,000 names go for $500 only because the buyer needed the money and could not wait a few weeks to sell.

    If you have the budget buy some good names and wait however your portfolio risk should always be assessed with liquid value. People who provide the most liquid value are other domain investors so as you build a portfolio you need to make sure the prices paid are equivalent to what you would expect another domain investor to consider a rock solid deal. This will provide some security in the event of a firesale.

    Of course, these numbers are hard to determine but any good domain under a couple thousand is a pretty safe bet. Again, the investor needs to understand what constitutes a good domain and this takes a lot more education than I could say in this post.

    In no other market do you have such a negative factor of liquidity going against you so yes, there is a LOT of money in this industry but you have to have patience and consider each buy a long term buy while building a portfolio with attention to firesale values..

    Your domain financialsamurai.com at face value is not worth much more than a couple hundred backs but because of what you have built its quite likely worth a small mint. This is the beauty of the internet – in fact, you are one of the true success stories on the web – never sell your domain, sell your site. You have the platform and ability to monetize this where I hope to see another bankaholic story one day.

    • says

      I agree that liquidity is what it’s all about. If everybody starts writing about domain name investing, money will flow through to the system, and prices will get bid up.

      GoDaddy and all those sites should do more to promote this market place if they’d like to boost profits.

      Tell me more aboutyour statement “never sell your domain, sell your site”? Can one accept buying my “site” without buying the url: financialsamurai.com?

  5. says

    Samurai,

    Sorry – I can see how that was a little confusing. In your case what I meant is once someone has a developed site with traffic then they really have to view any potential sale as much more than just a domain asset sale. Treat it as a real business I guess is what I mean.

    A lot of buyers will offer people with a semi-popular blog 20 or $30,000 and people will sell but its a calculated value based on tearing down the site many times just to show ads.

    Once you get a popular site up and running you need to shop and sell to people who have the same development interest (only much more resources)

    As for your question.

    No, someone is probably not going to buy your content without your domain .. however they will buy your domain without your content – when you get somebody to buy both then you have a winner.

  6. says

    Samurai,

    I should also note about domain appraisals. People love to see numbers on a screen which reflect property value. This third party recognition can lead to a good feeling about your investment however the domain asset category is probably the worst industry to rely on automated appraisals for value.

    Let’s use the real estate comparison. If your house is worth $500,000 then odds are any licensed appraiser will valuate your home much the same – plus or minus 10%.

    However with domains … oh my….

    Take http://www.lasvegashotels.com for example. A highly valuable domain no doubt however using some of the most popular automated “domain appraisal” systems around one can quickly get confused about a solid value range.

    Epik estimates the domain at $2,189,500
    http://appraise.epik.com/lasvegashotels.com

    Estibot.com estimates the domain at $755,000

    Now take the domain http://www.carloancalculator.com

    Epik estimates the domain at $48,000
    Estibot.com estimates the domain at $16,000

    ————————————–
    These are significant differences!!
    ————————————–

    No automated system can ever factor in the value of branding, how much the traffic is worth and many other elements to a common buyer since (outside of a pure domain investor) these dollar values change significantly. A hotel lead may be worth $5 to me but $100 to a hotel company. How can an automated appraisal factor in all of these unknown variables? It’s impossible (or at least not available currently) so any automated domain name appraisal is essentially fools gold.

    The lesson here is never believe a value on a screen. What is important however is the data you an extract from these appraisals outside of the pretty lottery ticket value. Important items are exact search, existing traffic, any existing pagerank, industry of the name (obviously financial related terms are worth more than classified ads) and more.

    A lot of people think domain asset investing is easy and sure – its easy to find one name and make a quick buck but to properly apply finances for a portfolio of domain name assets takes a lot of knowledge. The good news is that many of today’s success stories are people who started in the business less than three years ago so when you hear the words all good domains are gone this may be right – but it doesn’t mean there are not a lot of good domains still very affordable.

    Domain name investing is truly an acquired skill but one based on knowledge more than luck.

Leave a Reply

Your email address will not be published. Required fields are marked *