The Economics of Domain Investing

For most people the idea of domain investing sounds simple. They read a story about someone who registered a great domain ten years ago and then managed to sell it for a million dollars. Even the small wins sound great. I mean, it’s not unusual for someone to buy a domain for only $50 or $100 and then flip it for ten or even twenty times as much. Any domain investor out there will tell you about the rush they get whenever they manage to flip a domain for good profit. However, the activity of selling domains for profit can mask the hidden truth behind it. Although selling an individual domain for profit is nice, investing in them isn’t as easy as it sounds. Proper domain investing requires upfront capital to build a portfolio of domains and the process of selling them can take a long time.

Costs of Domain Investing

Domain investors can anticipate having at least three different costs. First is the cost of acquiring domains. This includes what you pay to hand register a domain and what you pay to acquire them from auctions or other investors. Second is renewal fees. You only pay these once per year, but the cost will rise as you grow your portfolio. Finally, it’s going to cost a good portion of your time. Research, bidding, and other tasks can’t be done in just a few minutes. While the cost for you to acquire domains and pay renewal fees might seem quantifiable, you also need to consider how much you could earn if you were spending all of that time doing something else. Few people take this into consideration, but you should because successful domain investors have a real passion and will spend several hours researching each day.

Domain Investing Metrics

In order to figure out the economics of domain investing you need to track the following:
1. Acquisition Costs
2. Ongoing Renewal Costs
3. Average Selling Price
4. Sell-Through Rate
5. Cost Of Your Time

Once you begin digging into these numbers you’ll quickly learn why domain investing isn’t as easy as most people think.

Running the Numbers

Below are some example figures that I will run through to give you an example:
1. Acquisition Costs – An investor acquires domains for an average of $100 through expired domain auction.
2. Renewal Costs – About $10 per year, per domain
3. Average Selling Price – $2500 per domain which is considered a sweet spot for most aftermarket sales.
4. Sell-Through Rate – A good portfolio with fairly-priced domains can sell about 1-1.5% of domains per year. If an investor owns 1000 domains then they should expect to sell between 10 and 15 per year.

Now, let’s say an investor buys 25 domains per month at the average acquisition price. They do a great job of buying the right names and listing them for sale in the right places, achieving a 1.5% sell-through rate (selling 1.5% of their domains per year). Guess how many months it would take for them to become cash flow positive each month? The answer is roughly 44. That means it would take them nearly four years with these results in order to start getting paid each month rather than spending money out of pocket. This is also without even considering the cost of their time.

Of course, if you can improve any of those metrics then the results become much better. For example, sell domains at an average of $3500 and you can expect positive cash flow each month after around 30.

Let’s compare this to buying a rental property. If you pay cash (like most people do for domains), then you are paying many years worth of rent up front with the idea you’ll be earning that money back over time. The same is similar with domains. However, the difference with real estate investors is that they usually finance their purchase. That allows them to immediately get positive cash flow between how much they charge and how much they pay the bank each month.

From Hypothetical to Reality

Some investors use different tactics, such as buying higher-value domains and doing more active marketing to sell them. The economic picture for these types of investors is very different from those who build up a portfolio of expired domains and let them sit around until a potential buyer contacts them. So with that in mind, results can vary.

The important thing to think about before you get into domain investing is your long range plan and how the domains you buy today with fit into that plan. Are you willing to go in the red for many years until you make back your money? Or, should you focus on acquiring high-quality domain names that you can actively sell to achieve a great sell-through rate? Domain investing can be extremely fun and profitable. But remember, a bit of advanced planning and forecasting goes a long way!