Making the Transition from Real Estate to Virtual Real Estate
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One of the many benefits to attending a live domain name conference and auction event is the ability to meet fellow domainers.
In meeting fellow domainers, one of the trends I’ve noticed is the number of traditional real estate investors that have made the transition to investing in virtual real estate – they now invest in domain names.
So as a domaining educator and lawyer I ask myself: “what makes investing in domain names so attractive to traditional real estate investors?”
As with most things, the best answer is the one that is most obvious. There are remarkable similarities between real estate investing and domain name investing. Similarities that make the transition both easy and attractive.
Let me explain.
Let’s first look at one of the core valuation principles used in real estate investing: The capitalization rate (or the “cap rate” as its most often called).
Real estate investors utilize capitalization rate analysis in determining what they will pay for a real estate investment and also to determine how well their real estate investment is performing.
An investor who owns a quality apartment building will be ecstatic to receive a cap rate of 8%.
What does that mean? It means that if the investor receives income (before mortgage payments and taxes) that is equal to 8% of the property cost, the property is a top performer.
So let’s look at how the cap rate is calculated.
Basically the cap rate is the annual income received divided by the price paid for the property. So, if a property pays the real estate investor $80,000 per year and the investor paid $1,000,000 for the property, the property is producing a cap rate of 8%.
That, my friends, is considered to be an excellent investment in the tangible real estate world.
Let’s get back to the start of this article. Why are traditional real estate investors rushing into virtual real estate investing (domain name investing)?
It’s the cap rate!
Check it out:
If an investor purchases a domain name for $9 and that domain name generates $60 per year in revenue from passive parking, what is the cap rate on that domain name investment?
Let’s apply the math. The cap rate is the income ($60) divided by the property cost ($9).
In this example the cap rate is 60/9 or 666.67%. That is a 666.67% cap rate.
That’s a primary reason why traditional real estate investors are making the switch to virtual real estate investing: it’s the incredible cap rates.
The most exciting part is that we are still in the infancy of the industry.
Those of us who take the time to learn the industry and do it right have tremendous opportunities ahead of us.
Great article and very enlightening Phil. It’s nice to see this business from another angle as I am just getting started with my first auctions and parked domains.
Very interesting point about the cap rate - there’s so much I don’t know yet, but you’re a good teacher Phil, and I appreciate your course. Thank you.
Thanks for another informative post. I happen to also be in Real Estate investing and this may be MORE valuable than dirt. Wish I had seen this opportunity 5 years ago, but have taken the “leap of faith” that the domaining industry will double by 2010. As soon as I post this comment, I’ll resume searching for more good names.