I see a lot of domainers diversify into real estate when they start making money. They view it as something similar to domains. The truth is that they would have been much better off if they would have kept re-investing in domains or other businesses.
My perception is that real estate investments are a sinful waste of money, money that maybe yields 5% per year. For us domain investors that is a petty return. If I would have a choice, I would prefer to have money in the bank than in real estate. Because it’s liquid and available for opportunistic deal making and this liquidity outweighs the forgone yield for me.
The main arguement made by domainers is that real estate is a very secure investment. Every domainer has paranoias that his domains might be taken away but he knows that nobody is going to take his house away. Hence they sacrifice yield in favour of security.
The big secret is that you do not have to sacrifice yield in exchange for security. The answer is diversification. If you have a diversified portfolio of high yielding investments (like domains) or businesses (obviously running the risk that some of these may default/go bancrupt) you will still be better off in the long run than if you plow money into real estate.
I like to illustrate things with analogies, so here’s one from the bond market. In the long run, a well diversified portfolio of junk bonds will perform better than a portfolio of tripleA rated bonds. Some of the junk bonds will obviously default, but the higher yield of the others will more than compensate for this in comparison to the AAA’s.
#1 by Pinto on March 11, 2010 - 13:28
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I agree with you, but its becoming harder and harder to find a decent domain for a decent price. whenever you approach a domain owner showing the interest to buy his name, he will instantly come with a price that is double or three times the market value
#2 by Logan on March 11, 2010 - 15:11
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I’m not a huge fan of real estate either. I wrote about it a few years ago: “You Don’t Own Real Estate. Real Estate Owns You.”
http://www.loganflatt.com/2007/07/you-dont-own-real-estate-real-estate-owns-you/
#3 by Edie on March 11, 2010 - 15:42
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I see an inspiration for this article
#4 by Mark Jeftovic on March 12, 2010 - 01:25
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When it comes to any asset, most of the value should come from what you pay for it. So real estate is fine, when you buy it at a reasonable price.
I think the gist of what you are saying is that you have to look at your asset mix in terms of capital allocation. You seem to have confidence that you can deploy your capital with more return into a domain name than into real estate. If that’s the case then you are making the right decision.
Diversification often runs the risk of ruining your absolute returns. If you look at the most successful investors in any asset class you often find a lot of concentration, not diversification. The rationale being that you only get a few good ideas, when you come across good investment idea that is within your circle of competence and you have an edge, you go in big.
The problem I have with domain names is that they haven’t been around long enough for me to think about them in asset class terms. It is really too early to tell if these things are really durable assets or just momentarily functional tulip bulbs.
Can you guarantee that in 50 years, network connected devices will still use an inverted tree mechanism and DNS to locate each other over the network?
I don’t think that anybody can.
In case you are wondering, I am not one of these people who typically think that high returns require high risk. If 5% per year seems paltry to you (I have to be honest, it seems paltry to me too) then you must be taking on higher risk by definition – I don’t believe that.
But what I don’t know is the long term viability of domains-as-assets. Sure, web businesses are here to stay, and as far as I’m concerned the returns are significant.
I guess what I’m saying in all this comes down to two points:
- any asset purchase can only be accurately judged in terms of the price paid on it, relative to intrinsic value and safety of principle.
- domains per se, may be high yielding now, they may not exist someday. Someday when houses and real estate still do exist, domains may not. I suppose that if that day comes, successful domainers would morph into whatever domains evolve into. That’s why for me, I try to think of things in terms of sustainable web businesses, not in terms of domain names.
#5 by Logan on March 12, 2010 - 17:42
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Mark, nicely said.
#6 by fandor on March 13, 2010 - 11:09
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If you are clever real-estate investor you can get 10-12% yield a year (in the Czech Republic). I own some properties where is yield almost 20% a year. Not as good as domains, but much better than saving accounts in banks.
#7 by Drewbert on March 14, 2010 - 20:22
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Money in the bank doesn’t help during a currency collapse. Neither does real estate really – except you need a place to live.
We live in strange times – what you don’t have in domains, you should keep in gold and silver.