Comparing the ROI of Online vs Offline Investments

Jul 12th

I am sure I have made similar posts before, but I live in an 8 unit townhome, and just down the street they are hauling away part of a mountain to make room for another one of these. Each of the 8 units has a rent of $2100 a month, which comes to a total of $16,800 a month.

Their costs include digging up the mountain, hauling away the dirt, permits and licensing fees, property taxes, cleaning, land, raw building materials, construction, interest on a loan, etc. By the time they are done I am sure they will have spent at least $5,000,000 to create a small revenue stream. A website I started a year ago took about $50,000 to develop, and already makes more than that building will. The virtual real estate investment required no loans, and the ROI is over 100x greater. If I build a strong enough brand my income stream will grow much faster than inflation and be nearly as stable as the real estate, while owning a more liquid asset with lower fixed costs. If you are aggressive enough, you can scale an affiliate site to a billion dollars.

The best investments you can make are in your own education and projects. As time passes the web will be more like the offline world and that 100x greater ROI will start heading closer and closer to 1. The only ways to prevent that from happening are to

  • keep testing and learning

  • heavily reinvesting in growth and brand building
  • be willing to fail and move on to better markets
  • use technology to automate
  • build a following and create social relationships with like-minded people
  • leverage your current assets to optimize and promote future business

I hope they have fun tearing down the mountain. I am off to get a few more links. ;)

Published: July 12, 2007

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Comments

Matt L
July 17, 2007 - 5:12pm

(Whistle...) $2100 a month for a townhouse? Guess that's a good price to pay to be plugged into the search community, though. $2100 a month will get you a decent house 2 blocks off the beach out here in Charleston. Of course there are only 3 search marketers out here, and one of those is my split personality :(

Danny
July 20, 2007 - 4:51am

I totally disagree. The overall return on the average website is certainly higher than real estate. The trade-in is risk. I may spend 100,000 on a website and the idea turns out to be crap, google randomly bans it, or for whatever reason it becomes worth nothing. If I spend 100,000 on real estate it will certainly earn me at least 5%, possibly as much as 12% plus a bank will let me borrow much more against real estate and at a much better rate than a website. The difference is risk. Websites are like junk bond and real estate is like investment grade bonds the higher the risk, the higher the reward.

Khalid Hajsaleh
July 12, 2007 - 10:17pm

Aaron, 2100 for a townhome? You ought to think about moving to Texas. I must agree with you that only through investing oneself, you will remain ahead of the curve. I guess each of thes bullet points makes for an excellent blog.

July 12, 2007 - 10:20pm

You ought to think about moving to Texas.

Andy Hagans recently moved down that way. I can't move there on principal. ;)

graham
July 12, 2007 - 10:28pm

Where have you been all my life? I've been thinking that way for a while and have gotten all kinds of crap for quitting college, even though i have learned more since I left than I did in all the years up til then

David
July 12, 2007 - 10:30pm

I absolutely agree. I have money in real estate, stocks, bonds, etc... and the best potential for return seems to be in my online activities. One recent online venture allowed me to pay off all my credit card debt, student loans, and 2 cars. Now, I am quiting my IT management job in 35 days and counting :) to work full time on affiliate sites. I know I'll make far more in a 1 year than if I continued to stay in the corporate world. Plus it's several orders of magnitude more satisfying to work when I want on what I want and to know that every ounce of work is being used to make more income. Try that in a corporate job... better hurry your boss needs that TPS report.

Todd Mintz
July 12, 2007 - 10:33pm

True, but I would take some of the cash thrown off by a high grossing website and plow it into "real" real estate.

Miguel
July 12, 2007 - 10:45pm

Aaron, could you make blog post with practical tips on building this type of investments?

If you were to make a book. I'd buy it as well. =)

July 12, 2007 - 10:53pm

If you were to make a book. I'd buy it as well.

And the crazy thing is that my SEO Book is prettymuch how I market stuff and what has worked for me, etc. That is why it is so draining for me to do updates...I learn quite quickly and the market shifts fast too.

My book is much broader than just being about SEO.

NickB
July 12, 2007 - 10:57pm

@Miguel and Aaron

I agree.. If someone made a book on the evolution of an affiliate site like that, with very actionable steps.. it would probably sell pretty well. At least to me and Miguel!

Also, you mention that VRE requires no loan - but seems to me if you invested 50k and required no loan - you just had that cash.. which most people don't. So chances are it WOULD require a loan, no?

OR are you saying you invested 50k slowly enough that you could fund it from other ventures? I so - can you give a timeline/burn rate? Thanks again for a great post!

~Nick

John K
July 12, 2007 - 10:58pm

Although virtual development is strong right now, real estate has been a proven wealth builder for, oh, 500 years or so.

Don't forget the fact that:
- Real estate development is usually leveraged
- Is subsidized in many cases
- Offers tax advantages

The developer doesn't necessarily have to put up ANY money to create that new building.

They may be able to build it and flip it for massive ROI.

July 12, 2007 - 11:10pm

Hi Nick
I only had to spend that much because I wanted to grow it to scale really quickly. As the model proved itself I invested faster and faster. If I didn't outsource the work and did most of it myself I could have still got far on about $5,000.

I also have helped others create things more profitable than the building for less than $5,000. One site I am thinking of only required a $2,000 investment to do so.

SEO Book has been a much slower and more organic growth play that required much less investment:

  • $8 domain name
  • $7 a month for hosting
  • $99 for a logo
  • $149 for the CMS
  • ~ $600 for Microsoft Office & Adobe PDF software

Later I bought a $1,500 site design, and spent thousands of dollars on creating SEO software, buying affiliate software, and marketing the website...but the site was beyond self funding for those pieces.

Investing money just saves you time though. Some business models scale well while others do not.

Miguel
July 13, 2007 - 12:51am

Aaron - I'd be very happy with an update on page 330 with more information about building affiliate sites.

I also wanted to say that you need to boost the price of the book to at least $147 - you offer much value to justify that price or higher.

Take care,

Patrick
July 13, 2007 - 1:00am

When you talk about investing and reinvesting in marketing your sites that makes me think of the blog post you did a few days ago..that you were looking for a link builder to outsource the link building to.

You said the job would pay 2,500$. What I'm wondering about that type of investment: How do you handle/judge the whole process? Do you give them some probation time and then decide whether you're gonna pay them again?

Im just wondering how you would judge whether the money is well-invested. Outsourcing the link building part of SEO (pretty much reinvesting your money into that part of promotion) sounds like a great idea to me, but Im really wondering how one would judge the work as the common frame in SEO is "no serious SEO will promise anything".

I'm more into planning the whole process..as in keyword/market research, creating the site, doing analytics, etc. ..but not so much into the link building process if I'm honest :-)

Paris
July 13, 2007 - 1:23am

Hey what scales better for a small business online than the domain world? Come to Klamath Falls. 500 acres for 250k. Aaron, I don't see a place to ask questions. I have a question for you and your readers.

Jim Spencer
July 13, 2007 - 1:45am

Aaron,

Speaking of updates...
Has there been an update of SEOBook since January?
When is the next update likely to appear?

Thanks.

mark rushworth
July 13, 2007 - 2:31am

had a client who, on the basis of an agencies statistics of an off-line marketing campaign expected 0.01% conversion from advert view to customer... yet when she was talking to me about adwords and SEO expected a 20% conversion... go figure.

James Dunn
July 13, 2007 - 4:08am

It is also difficult to get higher returns the more money you are investing. It is a lot easier for you to make a killer ROI on $50,000 than it is for a big company investing $50 million.

For example, business.com was originally bought for less than $10 and sold for (I believe) $1 million, a 100,000x multiple, if they recently sold that investment for $400 million, they made a 400x multiple, there is no way the new owners will make a multiple anywhere close to those before them.

tyler dewitt
July 13, 2007 - 4:29am

great post!

Søren Sprogø
July 13, 2007 - 10:37am

We have a saying here in Denmark: We can't all make a living by cutting each others hair.

Or converted to an online saying: We can't all make a living by posting about each others websites :-)

ROI isn't all. You have to consider sustainability and risc management too. Fx. what's the chance that some new technology or competing website will make your 50k investment obsolete vs. the chance of making brick'n'mortar obsolete.

Bricks certainly doesn't yield the highest ROI, but (my guess is) it yields the "safest" and most steady ROI.

Andy of HoboTra...
July 13, 2007 - 12:17pm

Very good. - Now how much is my 40K per year income web site worth?

I have made good money both with Real Estate and with a Web Site. I would say,

- If you are reading this page, then probably a website is best for you...

Both require you work for about three years for 40 hours per week and make no money, then one day the formula become clear.

If you have been working on a website for 5 years and are not making in todays web climate more than 10 US dollars per day... I would go and buy homes to rent or get different job.

Making a web site for money is not making money from a web site.

There is a stress ratio, and the amount of stress involved is different. A real estate investment is very stressful if you have to answer the telephone from renters. Web sites are sort of painless and easy, however a person has about a ten times better chance at getting rich with a real estate investment. The secret to making money is easy, Work!

Andy of HoboTraveler.com

Ed
July 13, 2007 - 1:14pm

Aaron,

what if I invested in a carefully selected "established"
website which is already earning income,
increase the profit somehow and improve usability.

Would this be viable do you think?

I'd rather buy a property that has already been built opposed to something that has to be built from the ground up, in my opinion.

ERB
July 13, 2007 - 1:51pm

Investments should be looked at based on Cash-On-Cash Return. How much money are the developers of your condo laying out vs borrowing... perhaps 20%. Therefore their COC annual ROI would be ($16,800 * 12) / (20% * $5M) = 20.2%. Thats not too bad.

Although I agree virtual real estate is more advantageous, from an investment standpoint, it would be nice if you only had to put up 10-20% of the investment for your online property and then borrow the rest as you could offline.

Ben Murphy
July 13, 2007 - 3:33pm

Aaron,

I think a lot has to do with ideas you have been talking about a lot recently on your site. Defensibility & building a real, sellable asset. I just read that netbusinessblog.com was for sale - looked it up and it sold for $13000 (sitepoint). On the listing, the sites monthly revenues were $1200 - $1500, with little to no expenses beyond webmaster time. So thats a site selling for less than 1 years earnings.

I wasnt a regular reader so i dont know all the details, but on the surface deals like that look like a steal for the buyer and a painful loss for the seller.

Whereas in your physical real estate example the owners are probably fairly leveraged and looking at very little downside when they do decide to sell...

While webmastering is a lot like real estate development - how far out are you honestly willing to make your earnings predictions? 6 months? 12 months? 24 tops I would say. My girlfriend was talking with me the other night and we were running numbers on my sites. I had to explain to her that, yes, the numbers are great, fantastic roi compared to anything else... but I could never count on them even a year or two out. Real estate deals use 30 year mortgages.... its a world of difference.

JB
July 13, 2007 - 3:44pm

You have to really consider what Aaron is saying here. A 50k investment. Sure! I think we all know online is where the money is today, and the potential money is going to be slowly declining day by day. However, who has 50k to spend on a website with no guarantee? Not many. Who has 5 mil to spend on townhouses with a 99% guarantee that the investment will hold its value and plus much much more? Thousands of banks. You cant just jump right into the online business and say, well this is what I want to do for a living. You can read a thousand blogs and forums, but the only way to put your ideas into action is to take BIG BIG risks. Some take the big risk and do very well.. others (go.com) take BIG risks and lose pretty much everything they invested. It really boils down to how much you currently make at your career, how much you have saved or current assets, your age(if your young you can always make back what you lost some day), and last but most important, what type of person you are (gambler or risk taker?). Some people know nothing about the internet or programming, but go in head first with good business and money management skills to become very successful. These type are rare breed online entrepreneurs that have these qualities and their model worked successfully, this gives them enough courage to try other new ideas and TOLERATE failure. Basically all I'm trying to say is its a rough path to fortune and fame through online investments and it requires more than a few thousand and a good idea. You also need a bit of luck!

Alexander
July 13, 2007 - 6:13pm

Many people are not ready still to trough money on sites, only smarts who know how and they make excellent and unbelievable profit. If we are talking about amounts from $0 to $500k to invest probably only Forex is better:) Narco and drug dealers are out of the game:)

I may suggest some idea to Aaron. There is a very big demand for service who will calculate all risks, profits, loss, etc. at least for known models (adsense, affiliates, etc.) Preferably professionals with something like 3 to 5 years of experience or so and who actually DOING the same you want to DO.

So apprasial firm just like with "real" business.

I will be happy to pay them for their services and I am sure MANY will.

July 13, 2007 - 8:21pm

I'd rather buy a property that has already been built opposed to something that has to be built from the ground up, in my opinion.

In many (often most) cases it is a better way to go.

I just read that netbusinessblog.com was for sale - looked it up and it sold for $13000 (sitepoint). On the listing, the sites monthly revenues were $1200 - $1500, with little to no expenses beyond webmaster time. So thats a site selling for less than 1 years earnings.

But that heavily discounts the value of webmaster time. The higher the base number is the more high value investors they can attract and the higher a multiple the site sells for.

While webmastering is a lot like real estate development - how far out are you honestly willing to make your earnings predictions? 6 months? 12 months? 24 tops I would say.

I think it depends on how much you believe in the idea, how much leverage you gain, and the opportunity cost of making it perform.

There is a very big demand for service who will calculate all risks, profits, loss, etc. at least for known models (adsense, affiliates, etc.) Preferably professionals with something like 3 to 5 years of experience or so and who actually DOING the same you want to DO.

This is a great idea. There are two big issues that I see with it though...

  • Banner Blindness if many people make sites in your markets or sites that look like yours the effectiveness of the marketing techniques (from link building right on through to conversion) drop off sharply.
  • Opportunity Cost many business owners would not want to pay $3,000 to $5,000 for a one day review, but if you compare that sum of cash with the opportunity cost of losing a day of building your own business the numbers you have to charge as your business grows start to look rather absurd to most potential customers

Of course if tips were heavily personalized one might get past part of that first issue. The only ways past the second one are to take on employees who do the reviews or serve few customers.

Alexander
July 13, 2007 - 8:39pm

Banner blindness - you mean here something like non-compete agreement along with consulting ? Or that professionals can't give same tips to a lot of people in one market in order to make all right ?

Yes, that's the issue really. Not sure how overcome:)

Opportunity Cost - Hmm, let's say if I want to spend $15k on website, then yes I probably wouldn't pay $3k-$5k for that. But if for $30k-$50k then yes. So something like up to 10% sounds reasonable for me.

Giovanna
July 13, 2007 - 9:25pm

Yes, the Internet probably has better returns. However, having experience in developing real estate, it will not cost $5,000,000 to build an 8 unit apartment, even in the high-priced Bay Area. As you know, they don't use up much land so the land price is probably less than $800,000. Excavation, permits and hauling will be around $700,000. Foundation work, $200,000. Framing, plumbing, electrical work $500,000. Finishing $750,000. Materials $450,000. Plus or minus $200,000

Chris
July 16, 2007 - 9:08pm

I have been thinking about this alot lately. I do well online but want to move part of my time and assets out of the tech sector. With globalization and talented people in India willing to work for $5/hour I personally think the future of this niche might be a little shaky. Good post.

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