This post is part of my series on digital investment. See here for an overview. More articles on investing in digital assets coming out every few days.
So you have money sitting in the bank and you want to invest it. Congratulations! You’re on your way to certain riches!
But seriously, what do you do with your money? Do you
- Buy a house? (Or another house or property?)
- Buy stocks? Everyone says the stock market outperforms the property market…
- Buy a small business like a cafe or a gym? It’s your retirement dream! (… it’s everyone’s retirement dream)
- Send it to me in unmarked $20 notes?
- Or buy a website or digital business?
There are of course many other things you could invest in. There are bonds (boring!), currency (I don’t really get it), crypto (nobody has been able to give me a cogent theory about why it’s an investment), or any other number of investments ranging from safe and low-return to wildly speculative and possibly life changing.
There’s no right thing to invest in. Any investment can fail totally. I should say “only invest as much as you’re willing to lose”.
General disclaimer here… you might succeed at stocks or property. Or know someone who did. Or maybe you know someone who failed at online business. I’m not saying that the path I’m proposing is a surefire one. I’m just discussing it because I’m doing it, many others are, and I think it’s cool and that more people should know.
The truth is, you can strike it lucky with any of the above. You might buy a house right before a boom, and hang on to it through thick and thin. You might happen to buy just the right stock, like I did when I bought Tesla.
Or you might fail any number of times, like the house I bought that didn’t rise much in value, or any of the other stocks that didn’t explode in value (or that I sold too soon).
What I’m going to consider here is on average, the objective reasons why you should (or shouldn’t) invest in an online business, compared to owning other common things to invest in.
OK, let’s go!
The Baseline — What are the returns of buying a website?
In summary, here are the advantages of buying a website as an investment:
- ✅ High returns — a well-managed website can make over 30% ROI. You will generally pay a multiple of around 3x annual profits.
- ✅ Location independence — You can work on a website from anywhere, and effectively at any time.
- ✅ Intellectual stimulation — while there’s something interesting in every endeavour, I personally think there’s a lot in the digital world. There are always new technologies, trends, and techniques. (This is another way of saying you have to do a lot to keep your edge!)
But there are also disadvantages to investing in a website:
- ❌ Work — Buying a website is not passive income. You have to keep working on it and maintain it. At a minimum, you should spend 2 hours a week on a website just reviewing data and dashboards and making decisions about what to do next — even if you’re not the person working on it.
- ❌ Risk — your website might fail, competition might strike, and the industry dynamics may change. Your investment might halve quite quickly, like a high-risk stock.
- ❌ The learning curve — there’s a LOT to learn about managing websites. There’s probably about 100 hours worth of material — at least! You have to know all the metrics, how to do quite advanced analytics, understand core web technologies, plus know how to manage a regular business.
Buying a Website vs Buying Property
My own dad is always trying to convince me to buy property.
There are lots of reasons that people put forward to buy property. I put these here without prejudice. They might be wrong, but they all have a degree of truthiness to them.
- ✅ Why pay rent when you could own something?
- ✅ Property prices always go up
- ✅ You can borrow most of the value of a property (100% in the good old days! But even post-financial crisis, you can still borrow 90% pretty easily) at good interest rates
- ✅ “Rich Dad” owns his own house (That’s a Robert Kiyosaki truism from Rich Dad, Poor Dad)
- ✅ It’s nice to have a failsafe if everything falls over so you won’t be homeless
- ✅ There’s lots of ways of making a property into a business — e.g. renting it out, putting it on AirBnB
- ✅ There are tax advantages to owning property (in Australia there’s “negative gearing” for example; many places don’t charge you capital gains tax on your primary residence)
There’s a degree of truth to all these things. There’s nothing intrinsically bad about owning a property in a diversified investment portfolio. But it’s not always the best use of capital — even if you don’t yet own a home.
Consider the following downsides to owning property:
- ❌ There are many expenses aside from the mortgage repayments. There are council rates, property insurance, landlord insurance ,maintenance fees, repairs from tenants (or yourself), and property management fees (if you rent it out), just to name a few.
- ❌ There is risk that the property’s value won’t go up like you expect it will or that it will go untenanted, or tenanted only at a lower rental rate.
- ❌ Your tenants might trash the place one day.
- ❌ There’s a risk that interest rates will go up (if you’re on a floating rate loan).
- ❌ Sunk time cost — You have to keep paying attention to all of the above, or pay hefty management fees to someone to look after it.
But what’s the actual benefit of buying a house? Modelling it out is pretty complicated. It depends on a lot of things, like what market you’re in, what kind of property you’re looking at, whether you plan on being an owner/occupier (or renting it out), and whether it’s your first home or not.
Rather than look into every one of those scenarios for you, I’ll look into the best possible one, which is a first home buyer who gets a first home buyer’s grant, and who pays no tax on capital appreciation.
Let’s say you’re buying a $500,000 house (congrats!). You have a $25,000 deposit (double congrats!), with $25K coming from the government in first home buyer’s grants (it goes up and down, and varies by state, but that’s a decent median amount).
You’re borrowing the rest ($450,000) at 3.13% over a 30 year period, which is what Commonwealth Bank offers right now.
Using their calculator (because I’m lazy/made way too many investment calculators in my day), you’d have to make a total of $694,410 in loan repayments over the 30-year lifetime of the loan. Which means you’d pay $744,410 for the property, minus $25,000 for the grants, totalling $719,410.
In that time, you’d also have to pay
- Stamp duty – you pay this when you buy it. It’s 2.5%, so you pay $12,500.
- Council rates — let’s say $1,000 per year (average for Australia) — which makes it $30,000 over the lifetime of the loan
- For repairs to things that break, like plumbing or sewerage — let’s say on average $1,000 a year again (another $30K)
- To renovate the bathrooms, driveway kitchen, floors, carpets, blinds etc, just to keep it up to date — maybe a major one every 5-10 years, investing $25,000 each time — let’s say $100,000 invested over the lifetime
That brings the total additional cost to $172,500, for a total investment of $891,910.
In thirty years, your house has gone up by an average of 7.5% a year. This means that your property would have gone up in value from $500,000 to a whopping $4,377,477. Congratulations again! You’ll lose 2% on the sale (fees to agents and so on), so your effective value is $4,289,927.
But what kind of return is that over 30 years? It’s a fairly boring sounding 5.38% return. Millions of dollars sounds huge, but it’s not that much when it takes a third of a lifetime to make it.
(Yes, I simplified this model a lot to help conceptualise it easily. In reality you don’t pay all that money up front; but also, you may pay more later as inflation goes up.)
Meanwhile, if you buy an online business, you could spend $50,000 and start earning $1,500 a month from it, for a 30+% annual return.
Heck, even if you buy stocks, you’ll make a handy 8% a year… but you’ll have to pay capital gains tax on it when you cash in.
The calculation is a bit different if you buy a property as an investment property. In those cases:
- You get rent income to offset the repayments, but you have to pay a management fee
- You can’t borrow as much against the principal, and you usually have to pay a higher rate
- You have to pay capital gains tax on the sale price
In sum, it’s a different calculation, but the returns aren’t stratospherically different.
Buying a Website vs Buying Stocks
It’s easier to compare buying a website to buying stocks.
The advantages of buying stocks over buying a website are that
- ✅ Liquidity — Stocks are much easier to buy and sell — you just need a brokerage account
- ✅ Lower learning curve — Data and research methods for stocks are much more standardised — you look up a few ratios, read the annual reports, read what smart people say, and make a decision
- ✅ Little work — It’s much easier to buy and hold stocks — you don’t have to do any active management of your stock portfolio (maybe rebalance it once in a while, if you believe in that)
The disadvantages of buying stocks over a website are that
- ❌ Tax — You pay capital gains tax on the gains, when you choose to realise them
- ❌ Risk — You may loose all your money and it might be totally out of control. This depends on what you buy, but there are still market crashes.
- ❌ Psychology — There’s a danger in becoming over-obsessive about buying the right things and timing the market (understanding your own psychology can be a nightmare)
Let’s look at the overall numbers. You know that the annual returns on buying a website are around 30% if you buy in the median price range.
Comparatively, the returns on buying stocks are a lot lower:
- The long-term average of investing in the DJIA is around 8-9%.
- Investing in the S&P500 gets you 9-10%, and
- Buying the NASDAQ gets you 12-14%.
That’s looking over fairly recent snapshots in time (in th epast 10-15 years) — when you choose to buy, and when you choose to sell, makes a HUGE difference.
Of course, you might choose to not take the classic advice of buying an equity index and buy some specific stocks. Because you know everything, right? Well, I thought I did. Over years of investing in stocks I made mistakes that cost me many tens of thousands, and I avoided gains of hundreds of thousands by buying the wrong assets and selling too early.
The benefit of buying stocks is that it’s so easy. There’s nearly infinite liquidity and very low costs of making an investment.
But the ease of buying and selling stocks is also the problem. Buying and holding a stock, and not worrying about when you’re buying it and how much you’re putting in, is very, very difficult.
To whit — for the last 2 years I’ve held $200,000 in cash, “waiting for the right buying opportunity”. It was cash left over from my last major series of investments in mid 2017. One came along in early 2020, and I missed it, thinking the market would crash further. The market rebounded completely. Had I invested it in mid-2017 I’d be up about 50% or $100K. That’s nothing to sneeze at!
There are also the stocks I sold too early (Google), and the ones I never bought (Netflix). Then there are the mistakes waiting to happen, like my current holdings, which I might sell at the wrong time… either too late, or too early.
The way of mitigating all these risks is normally to do a series of very boring things including
- Buying a diversified pool of funds that have as low management fees as possible
- Layering in your money over a period of time, not worrying about timing the market
- Buying tax-optimised assets (depends a bit on where you live)
- Rebalancing to take advantage of local tax rules (e.g. writing off losses)
- Holding forever
If you do that, there’s a good change you’ll see a healthy return over a period of time. If you scrounge together $50K, you’ll be likely to see $872K after 30 years. After your 30% capital gains tax, that’ll be $610K, or 8.7%. (That’s still doing better than property, above.)
Further, if you buy stocks, you can keep investing money into the stock market. There’s basically no limit to the amount that you can invest. This is different to buying property, where you are limited in the amount of properties you can buy by banks, prevailing interest rates, and also liquidity — you don’t find deals every day.
Buying an online business vs buying other businesses (or other stuff)
Finally, I want to compare buying an online business vs buying a fixed asset business.
I think this is interesting because in many ways, there are a lot of similarities between buying an online business and buying a fixed asset one.
- Prices are similar. I’ve seen fixed-asset businesses (like cafes and gyms) sell for similar multiples, like around 2-4x revenue (plus the assets)
- Complexity is often similar. A gym or cafe is also a numbers game, trying to do advertising to pull customers in the door, and trying to spend less on acquiring each customer than the lifetime value of each customer.
- You’ll probably have to work on each one. You’ll have to work to maintain a blog or ecommerce shopfront, and you will probably spend a lot of time managing a cafe or gym, rather than being hands off and letting the cash roll in.
But of course, there are obvious differences between an online business and a fixed asset business.
- Online businesses have no assets. They do have assets of course — text, a server contract and so on — but you don’t have to pay for those to acquire them. (The only assets you might buy is inventory in a shop that holds inventory.)
- Online businesses are location independent. This is a pro if you don’t want to be tied down to a place, or if you want to work from home. But it’s a con if you want to create a place where friends can hang out, or where you can meet new people. There’s a reason owning a cafe or gym is the dream of so many people!
I could probably go on comparing buying an online business with many other asset classes. But the truth is, I haven’t personally owned bonds, invested in venture capital type transactions (well, once or twice, but it was just a thing through friends), or bought more than a couple of grand worth of crypto (and to this day, I don’t know why I did it).
You do have to make your own educated choices. But I’ll try to introduce this new asset class to you, just in case it tickles your interest.