The first thing you should do is analyze how much revenue the site you are looking at brings in and where that revenue comes from. The next thing you need to do is figure out how you are going to increase it. If the site is not monetized at all, this will be very easy. For many sites, Google Adsense is the only source of revenue. In both of these situations you can increase the site’s revenue and sell it for a profit.

You should plan on adding several different streams of revenue. One of the best sources of income that is often lacking from a site is private ad sales. Private ads are great because the middleman is cut out and you keep all the profit and set your own prices. A donation button is another revenue stream that is often overlooked. You can also start selling your own products an example of which would be selling an eBook. If you do not have a product to sell you can still create revenue through affiliate programs. On [Re]encoded, we put Vizu power polls below our posts and companies pay us for research that they receive. If you own a blog you can get paid by doing sponsored reviews through companies such as reviewme! There are endless possibilities for monetizing a website and if you can successfully implement a few of them you will increase revenue the value of your site.

No matter how many streams of revenue you have, you still need a plan for increasing traffic. No matter how you look at it, the more traffic your site receives the more it is worth. Increasing traffic to your site boils down to two things, links and unique content. Your plan should incorporate both. Establish a link building campaign and make sure to always be creating unique content.

There are several things you should be looking for in a site. On the Internet, content is king, so the first thing you should look for is how the content is generated. Preferably you want to find a site where the content is user generated. A forum is a great example of a site where the content is created by the users. A social networking site is another example. If you are looking for a passive income, this is the way to go. I will discuss the next steps to investing in websites in my next article.

But how do you measure the success of your site? For many webmasters the buzz of owning a hobby site is reward itself. For others the community they’ve built up makes friends and valuable contacts. Returns from a site could include the satisfaction from increasing traffic, getting to a high position in SERPs or showing off a high Page Rank. But one thing is certain: when you come to sell your site, all of that is going to pale against the main criteria on which buyers value sites.

Yes, it’s money. The amount of money you make, the length of time you’ve been making it and how much of effort is involved in generating that profit are some of the main motivators for buyers. But valuation is a cross between a complex beast and an art form. Sites apparently making no money sometimes sell for vast amounts. Think youtube.com. Think myspace.com. So if you want to take a tape measure to your site and see what it would command in the market, what do you do?

There are two ways of approaching it. Try one of the online valuation tools. Any search engine should point you a few. And you’ll be amazed at how many million your site or blog is worth. Most of the valuation tools aren’t really tools at all. They’re designed to flatter you so much that you’ll give them a click-here-to-see-how-fantastic-I-am backlink. And that’s their primary purpose. They exist to collect backlinks, not value your site.

Now, however, there’s something different: A valuation tool that values your site realistically, a tool that analyzes your site and compares the metrics against a range of similar sites that have sold in various auctions. It then comes up with a figure and a detailed valuation report that’s surprisingly accurate. Value your website at this new resource. Several sites that have sold recently found that the price they got was within 10% of the value predicted here. As valuations go, that’s scarily accurate.

There are a variety of ways you could use this tool. For example, you could use it as a development guide – try different figures in there to see what increases the value of your website or blog. Or, if you’ve read my recent post on buying websites, you’ll find this tool invaluable in assessing, valuing and doing due diligence on any site you’re looking to buy. Once done, head on over to ebizvaluation’s sister site that covers all you need to know about buying and selling websites.

With the Dow Jones experiencing its biggest drop in history, and the stock market losing over 1 trillion dollars, people are looking for other places to invest their money. I recently took the money I had invested in the stock market and put it into websites. When the stock market crashed, my funds were completely unaffected. Recession or not I still consider websites to be the better investment. Historically, if you invest in the stock market for the long run, you can expect about a 10% return a year. If you invest in bonds, you can expect an even lower return.

Now let’s take a look at these returns compared to investing in a website. The first website I ever purchased was gamedip.com. The site cost me $3,000. Now, if you invested that money in the stock market you could expect a 10% return after 1 year. But let’s assume that you are an experienced trader and you crush the market with a 20% return. So after one year your $3,000 becomes $3,600. Not bad, especially considering the fact that if you left it in a savings account you would end up with $3030 (1% return).

Now let’s compare this with my first novice investment in a website. When I bought my first site, I had absolutely no idea what I was doing. I came across the listing for Gamedip and the description intrigued me. First of all, the sites content is 100% user generated; the sites users are the ones that create new games. I realized that if I bought the site all of the work was done for me. Secondly, the traffic was 100% organic (it was not paid for) so my only expense would be hosting. As far as revenue, the description said the site made about $150 a month from Google ads and affiliate links. Anyway, I bought the site, and in two months it made $280 in revenue. After two months of owning Gamedip I was contacted by someone who had wanted to purchase Gamedip at the same time I did but missed the opportunity. I told him about how great the site was (content user generated, organic traffic etc.) which made him regret that he didn’t purchase it even more. I told him I would sell him the site for $4,000. We eventually agreed at a price of $3,600. He sent me the money through PayPal (which took $100 in fees) and I ended up with a $500 dollar profit from selling the site plus $280 from Adsense revenue (minus $40 for hosting) for a total of $740 profit. $740/$3000 = a 24.6% return in only 2 months. Although this is only one example, the fact remains that this comparison takes the results of an expert stock trader against the results of a novice web site investor with the site investor racking in a larger return in 1/6 the time.

Now let’s look at the risks. With websites you have to worry about a few things. First of all there is the problem of sending a stranger thousands of dollars over the internet. Although this can be nerve racking, if you complete the transaction through an escrow service, it that ensures you will not get cheated. Basically you give the money to escrow, the buyer transfers the site to you and you have a grace period to determine if the seller gave you accurate information about the site. If you proceed through an escrow service, the possibility of someone stealing your money and giving you nothing in return is essentially eliminated. The major risk of investing in a site is that the sites revenue will be significantly less than expected. However, even if this does happen, with enough work you can increase traffic and create new revenue streams. With the stock market you have to worry about corporate scandals, market drops, and market manipulation. Both investments are relatively risky (when compared to bonds etc.) so even though in my opinion websites are the safer investment, for the purpose of this article we will assume that the risk is approximately the same.

Since investing in a website is no riskier than investing in the stock market, the better investment is clearly the one that offers the best return. Here is another personal example that will show the potential returns of a site. My second website I bought for $7,500. The site is called freebiesociety.com. The site is actually a little bit of a disappointment, bringing in only $300 a month under my management. Despite the fact that I am disappointed by the income the site still creates a 4% return a month. That translates into a 48% return in a year– 38% higher than the average yearly return of the stock market.

With such a high risk to reward ratio, websites are clearly the superior investment. The fact that not many people have realized this makes it all the better. But people are starting to catch on http://www.nytimes.com/2008/07/29/technology/29flip.html. So if you are going to get started, you better hurry up before everyone else rushes in!