Business Term – Return on Investment
Hit the web in search of killer ROI
I’ve been spending a couple hours a week for a few weeks now playing Cashflow 101. Mostly I play alone and I intentionally put myself in a really difficult financial position when starting the game, to see if I can still get out of the rat race and get rich. It’s all in the spirit of training my brain to understand the world of money.
One thing that is clear is that the game boils down to a simple formula…you get rich by acquiring assets [things you control that put money in your pocket, and hopefully appreciate too]. What frustrates me about the game is that it is so “real estate centric.” ROI this % and blah blah blah. I have as much feel for real estate investing as I do for women’s Olympic weightlifting.
So I started wondering if there was any correlation between real estate investing and Internet businesses and I started thinking…if each little green house from Monopoly was the equivalent of a website, then maybe I had a way to transpose my understanding of the Cashflow game into an arena that was more useful to me.
ROI = Return on Investment
Here’s the formula we’re going to play with. This is usually calculated in a yearly time frame:
(payback – investment)
———————————— * 100 = ROI in %
investment
Let’s work through a typical real estate investment card from the game:
Condo For Sale – 2Br/1Ba
38% ROI, may sell for $45,000 to $65,000
Cost: $55,000 Mortgage: $50,000
DownPay: $5,000 Cash Flow: +$160
In the game you always take this deal.
Next I went to a place I know to buy and sell websites online and found what I believe to be an average website being sold:
Site for Sale:
Cost: $10,000 Mortgage/Financing: Not on this planet!
DownPay: $10,000 CashFlow: $900/mthOur ROI then becomes:
(10,800 – 10,000)
——————————- * 100 = 8%
10,000
Now you might think that 8% kinda sucks [although a lot of folks would be darn happy with 8% but this is what would be classified as a high risk investment so you'd want to get more than 8%].
However let’s take a look at year 2…since we are paying for the entire investment up front, there is a dramatic change. Let’s say we “invest” another 100 a month to promote the site and profit remains the same as year 1:
(10,800 – 1200)
——————— * 100 = 800%
1200
Yes, that is 800% !!! Try finding a deal like that in the real estate market.
Then being the good Rich Dad disciple that I am I couldn’t help but think that the only thing that would make things sweeter would be if I could finance the deal, and not have to lay out 100% of the cost up front. After all the purpose of the game is to “control” assets and gain cashflow, and the best way to that is to use leverage a.k.a. “other people’s money.”
I know it would be nothing for me to find, say credit card money of 20 or 30k to play with….
[BIG FAT HUGE DISCLAIMER **** THIS IS JUST A FUN EXAMPLE **** PLEASE DON'T DO THIS UNLESS YOU TAKE FULL RESPONSIBILTIY FOR YOUR ACTIONS AND ARE PREPARED TO LOSE ALL YOUR MONEY AND RUIN YOUR LIFE]
…yes that is “danger” music you hear in the background.
So if we HYPOTHETICALLY finance our website with credit card debt [I'm not being too precise with the numbers here...just generalizing].
Year 1 looks something like this:
Cost: $10,000 Mortgage/Financing: $9,000
DownPay: $1,000 CashFlow: $600/mth(7,200 – 1000)
——————— * 100 = 620%
1000
That’s a 620% return and $600 a month net cashflow with only $1000 out of pocket and you’re paying back $300 a month on your $9000 credit card debt, which means you’ll have it paid out in 4-5 years.
Who needs real estate?
With Internet usage still in its infancy, Google just had it’s 8th birthday, for example, the web real estate boom is naturally just beginning.
However, there is one major difference between the Earth and cyberspace and that is of coarse the law of supply and demand. With a finite Earth and an rapidly expanding population, the value of real estate must increase. In cyberspace there is no such limitation on expansion.
Only simple domain names in the popular extensions [.com, .net & .org] have any real scarcity value and that will continue…unless of course someone figures out a way around it, which in the world of technology is almost certain.
Conclusion
There’s very good money in online real estate investing, but you had better know your stuff as the risks are higher than with physical real estate. Also, the time frames are likely to be tighter, meaning what is a good site now, will almost certainly be lower value in 5 years without someone skillful guiding it into the future.
I guess the bottom line is that buying web sites as investments is more akin to buying businesses than real estate. Higher risks and potentially higher returns, and also higher maintenance requirements.
I’d like to hear your thoughts on this topic, especially if you have any experience in either real estate or website investing.
Jon Symons
Playing Cashflow 101 obsessively, so you don’t have to.
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Comments ( 7 )
[...] Finally, there is a new game that you might want to check out if you have an entreprenuruel spirit, or want to make money online. You may have heard of Guy Kawasaki’s (Rich Dad, Poor Dad) board game kind of like Monopoly – this other game claims to be the first and only internet marketing board game – its even called… Internet Marketing Board Game! The idea behind this kind of game is that you have a ton of fun while learning about techniques, processes, tools, etc. From what I understand the team behind this game has done a ton of research (they have their own company that teaches people this stuff) and done “testing” in southern California (I’m guessing that testing a board game is way more fun than testing software!) So why do I post this here? Because my message is about career management, and there are a ton of people that have other income streams that help in case of a job loss. It is not cheap, and I haven’t played it yet, but knowing these ladies it is complete and fun. Geez, I wonder why I haven’t been invited to play, as they live in the same city as I do [...]
JibberJobber Blog » Blog Archive » Miscellaneous Miercoles added these pithy words on Nov 29 06 at 8:01 amEdmontonShaz added these pithy words on Oct 06 06 at 6:19 amJon,
You’re not comparing apples to apples. If we are discounting the amount of downpayment returned in each year you will see that in year one your RE investment returns 38%. In Year two after discounting the $1920 returned to you, your RE Return is 62%. Third year 166%, and from the fourth year onwards, assuming you spend only the $100 on marketing (more than I ever spent to get a tenant in place) and discounting inflationary price increases (average of 4% per year compounded – so your rental income actually doubles every 18 years without any increases due to external pressures such as labor market conditions, etc), your ROI then climbs to over 1900%.Again, this means that the $5000 you put down on your credit card or whatever, would be repaid in 32 months or so (plus interest) and the building itself has an inherent value, if only for taxable gains due to depreciation.
An interesting thought though – why don’t we set up a bank for financing websites? Lots of due diligence, but micro-cap loans of less than 10K a piece should be easy to do without too much trouble.
Jon added these pithy words on Oct 06 06 at 8:56 amThanks EdmontonShaz, I knew my real estate calculations were a bit shaky.
“why don’t we set up a bank for financing websites?” ….m m m that even scares me
The concept of what we would reposess if they miss payments is the most troubling…they could really ruin the site…it’s not like there is an inherent land value on these things.
Now if we took more of a venture capital approach where we installed ourselves as directors in exchange for a percentage of the investment, that could work.
Will be fun to chat about it the next time we get together.
EdmontonShaz added these pithy words on Oct 06 06 at 9:45 amOr you could get a personal guarantee on the loan, amortize it over 18 months, charge 24% interest, and have the server in a foreign tax haven so the money is virtually untraceable and repossession would be available on all items they own including residences.
An idea anyway.
Jon added these pithy words on Oct 06 06 at 9:55 amYou’re making the credit card financing option look pretty good for the buyer
Tyler added these pithy words on Oct 06 06 at 11:03 amSmall financing can be accomplished through Prosper.com. Lending or borrowing is an option. I wonder if a company can set up an account with prosper and specialize in internet/website loans?
This would relieve some of the administrative hassle.
Just my couple of pennies.
P.S> Jon thanks for the help with nhldigest.com. I have been promoting it a little since I went “live” three days ago and my goal is to get 100 uniques tomorrow.
Thanks again!
Tyler
EdmontonShaz added these pithy words on Oct 06 06 at 3:37 pmUnless the buyer is overseas in a non-first world market and does not have access to ready credit as we do here.
We might have to look into creative compensation packages in case of default. Perhaps a bunch of hours of website development or technical assistance to a multi-national company in lieu of actual payment.Sounds like force servitude in a way…. Maybe a re-think is needed.