Domain names (such as “startupnation.com” or “resourcenation.com”) are generally considered to be virtual real estate. They are the digital land upon which websites reside.
Currently, domain names are, on the most part, purely bought and sold. Some domains are considered more valuable than others for reasons such as age, length, word-type, Google PageRank™ and existing traffic. There are some domain names that attract 7 figure prices, such as Clothes.com, which was purchased by Zappos.com for $4 million. Instead of location, location, location, it is a case of ‘catchy, catchy, catchy’ or ‘PageRank, PageRank, PageRank.’
Up until recently however, domain names were simply one dimensional as an investment; they offered only the prospect of capital gain. ‘Domainers’ have purchased catchy, brandable and aged domains in hopes of holding them or developing them over an extended period and then selling them for a profit. Now, though, there is a great new option to generate passive income from domain names: domain name renting.
Domain Name Renting - A New Alternative
Domain name renting functions as an agreement between the domain owner and the renter whereby the renter is allowed to place his content on the domain or redirect the domain for a set period of time and at the cost of a pre-determined monthly fee. The domain owner sets the lease terms (i.e. the number of months that the lease exists and the monthly fee that will be charged to the renter).
Determining the monthly fee is generally based on the quality of the domain name. For example, a domain that is catchy, pronounceable, is five or six letters in length, has a high PageRank and a few thousand relevant backlinks may attract a sale price of a few thousand dollars. The rental fee, however, must be significantly less than this to make the transaction economically viable for the renter. If he or she cannot afford the thousand dollar sale price, then the domain name may be rented for a year for a third of this price, around three hundred dollars ($25 per month).
This represents a 33% return on investment for the domain name owner (much better than the 10% he or she could gain from a high-yield bond or other investment) and is a more affordable option for the renter than having to outlay a large lump sum. Hence, the domain name owner has a new passive income and the renter gains access to a valuable, relevant and catchy domain name.
It has been suggested that the process of domain name renting is not economically viable for the renter as he could register a new domain for only $10 per year. However, doing so means that you must spend a great deal of time and/or money in order to optimize the domain for search by building backlinks in blogs, forums, social bookmarking sites and directories.
The Financial Case for Domain Name Renting
Here is a case study in support of this theory. In scanning a number of link-building services, links can be acquired for $0.75 to $1.50 per link. Thus, to get 1000 links to your domain, you can expect to spend over one thousand dollars for quality results. According to Dnscoop, the domain name ‘youngbusinessowner.com’ has 2476 inward links and is valued at $433. If the owner of this domain was willing to enter into a rental agreement at 30% of it’s value per annum ($130 per year), the renter would be able to have those 2476 links directed toward their content. In this circumstance, the content owner is better off with the second option, domain name renting.
Problems can arise, however, with creating contracts between the domain owner and the renter. The owner has the power to change the DNS settings of the domain name to a different location other than where the renter’s content is being stored. Though, domain renting services seem to have found a solution to this problem by providing an escrow service that ensures both the domain name owner and the renter keep to the agreement.
All in all, domain name renting is a very interesting prospect that I’m sure will change the face of the domain industry in the years to come.