Following up on yesterday’s series of posts about cheap buys, I’m now flipping to the opposite side of the spectrum: major acquisitions. While dropping 1 or 2K on a website (or even less) is often a no brainer (especially if you can recover your investment within 6 months), putting $50,000 on the table to buy a site changes the game a little bit. In fact, you are really moving from the $5 poker table to the $1,000 ones. But before we start on major blog acquisition strategies and how you can grow your empire, let’s take a look at what I call a major acquisition.
There could be different definitions out there and this is why I want to explain what I mean by a major site. I’m not talking about an outstanding site (this would be like GRSfor example) as these are out of my reach… for the moment. To be a major site, you need to fit the following metrics:
– Making over $1,000 per month for more than 12 months in a row
– Having multiple sources of income
– Getting a high volume of traffic (over 20,000 visitors per month)
– Getting over 50% of your traffic from search engines
– Having over 1,000 RSS feed readers (or newsletter subscribers)
– Having over 2 years of history
If you have reached these metrics, congratulations! I consider your site as a major site ;-). Since over 50% of bloggers don’t make $1,000, these sites are becoming very attractive. Major sites have a consistent history and therefore, show some stability in terms of traffic and income over time. This is why they can be valued over 24 month worth of income.
When I look at major sites, I look at them as consistent money making machines. They should be viewed as businesses or as rental properties. The bigger multiplier is used because the site has proven that it can generate a great income many months in a row. If you fail to prove consistent revenue, forget about it; you are not a major site.
But there is more than just income when you consider major sites. They get privileged positions for certain keyword rankings. In other words, Google likes them. And if Google likes your site, doing SEO becomes a lot easier. For example, do you think it’s hard for me to rank for dividend keywords with The Dividend Guy Blog? I basically just have to include my keyword in my topic and subtitles and I’m almost sure to finish within the first 2 pages of Google within 24 hours. No link backs, no internal linking, no article marketing. Just a simple, good quality article. Why? Because DGB is a major site and Google likes it. This is exactly where you can suck up so much power from major sites where you can’t do squat with smaller sites.
This is major leverage you can use to grow your income by 10% to 20% the very first year. The great part about this is that the income is sustainable and will continue to be paid into your pocket month after month.
Leave the world of internet for a moment and look at common rental properties. Depending on the market you are in, rental properties would sell between 10 to 15 times the yearly gross income. This doesn’t include time spent, empty rentals, cost of maintenance, municipal and school taxes, interest paid on mortgage, etc. For example, a property making $2,000 in rent per month would sell between $240,000 and $360,000. People are ready to pay such a high price for 2 reasons:
– Because it has been proven that the property will generate such revenues in the future
– Because the buyer expects the property to increase in value over time
Nonetheless, if the buyer has a $50K down payment and buys this property at $300K, he won’t be making crazy investing yields. Let’s do the math for fun:
Total income: $2K * 12 = $24,000
Expenses on a rental property:
Interest (roughly 3.5% of the amount of the mortgage): $8,750
Maintenance costs (let’s say $100/month): $1,200
Municipal and school taxes: $4,000
Total yearly cost: $13,950
Total Investment Yield on down payment: ($24,000 – $13,950) / $50,000 = 20.1%
Total Investment Yield on the value of the property ($24,000 – $13,950) / $300,000 = 3.35%
As you can see, what makes rental properties interesting is the leverage behind the investment. If you had the $300,000 in cash to buy the property, the investment yield would be 6.26% (you need to take cost of maintenance and municipal taxes while ignoring interest cost). A “big” 6% before taxes. And THIS is the best case scenario. Eventually, you’ll have to do major renovation (roofs, windows, etc) and you may have an empty rental too. However, people are ready to pay crazy multipliers because they assume it’s a safe investment. They will also argue that I didn’t account for the possibility to increase the rent and the rise in property value. The overall yield is probably over 10% if you take these 2 factors into consideration.
On the other hand, if you take the very same 50K, you can probably buy a major site making something between $1,050 to $1,388 per month using a 36 to 48 times multiplier. So let’s run the same magic and check the return on investment. So let’s say you paid 50K for a site making $1,250 per month (so 40 times the monthly income).
Total Revenue: $1,250 * 12 = $15,000
Expenses on site:
Server ($100/month is more than enough) = $1,200
Writers ($25/articles, 3 articles a week) = $3,900
Total expenses: $5,100
Total investment yield on investment: ($15,000 – $5,100) / $50,000 = 19.80%
So we are now faced with 2 possible investments offering about the same rate of return if you ignore the $250,000 mortgage you took to buy the rental property. Can you really ignore a $250,000 debt? I don’t think so. So if you compare apples to apples, we would need to look at the return on a $300,000 investment in a website. Let’s say you just found 6 sites that sell at $50K for the same metrics. You will be getting 6 times your revenue and pay 6 times the same expenses. Therefore, the investment rate on a major site is still 19.80% vs 3.35%.
On top of that, I didn’t factor any time spent to take care of your rental property. However, if you pay a writer to write 3 articles a week on your site, you won’t have much to do to reap the benefits. The interesting part is that the website will also offer the possibility of increasing your rent (make more money with your site) and see its value appreciate over time. Therefore, you are in front of a simple decision:
Would you rather make 3.35% or 19.80% return on your investment?
You might argue that the internet is more risky, I dare you to prove it!
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