Domain name registrations require annual renewal to maintain ownership. Big deal, you might say, but allow me to make a historic parenthesis.
While we can't pinpoint the exact moment domains became an investment target—as opposed to simply a means of bringing your business online—we can safely place that moment at a time when domains cost zero dollars and no cents to register.
Initially, registering domains was a manual process requiring filling out forms on paper, and even when parts of the process became electronic, one still had to fax a paper application to secure a domain name.
The sheer volume of applications for domain registrations became too much of a workload to perform for nothing in exchange; in September 1995 a pricing scheme was introduced for .com, .net, and .org domain registrations.
From that moment on, registering domains involved the upfront cost of $100 dollars for two years for .com, which was reduced to $70 dollars after an arbitrary tax was removed. Still, paying that registration fee every year forced many who somehow accumulated quite a few domains to let them go after the first three to five renewals.
Furthermore, following the so-called dot com bubble in 1999-2000, thousands of domains dropped, leading to the first digital gold rush in history.
Registering domain names with investment in mind requires a process that takes into account at least two parameters, time and money.
As time passes, a domain registration's expiration date approaches. A domain must be renewed to be kept, thus costing money. Domain investors can quickly accumulate domain portfolios that cost ever-increasing amounts of money to renew. On top of that, the cost of renewal is not fixed; domain registries do increase the base price, and do so annually.
Doing the math one has to take into account the average "lifespan" of a domain in their portfolio before it sells. Although domain parking, PPC, and revenue via affiliate marketing can help offset a domain's cost, that luxury yacht sailed about a decade ago, leaving domain investors with a less fancy boat to ride on.
What strategy should domain investors follow to maximize their return on investment?
Clearly, there are domains that have a limited relevancy and lifespan. Many domain names are "newsworthy" or linked to particular events, periods of time, social or political events, or related to technology that could become obsolete.
These are the short-term domain investments and should be kept in a separate category within an investor's portfolio. Short-term domain investments represent an opportunity to sell, perhaps at a high price, but one must strike while the proverbial iron is hot. Considering the fast pace of things on the internet, it's quite possible to register a domain today and sell it tomorrow, as long as it's linked to something of extreme popularity or interest. These "unicorns" are rare, however.
On the other hand, long-term domain investments can be grouped into two sub-categories: generic, ultra-premium, or dictionary domains, and descriptive, composite domains, and brandables.
The first group can be harder to acquire in the first place, as it requires a higher than average investment point. If you bought such domains five or ten years ago, odds are that they have quadrupled in value, if not more. Older domains have probably become even more valuable, depending on the length or the keyword.
Holding them long-term makes sense, and it's not rare for these domains to reach their peak value after ten or fifteen years have passed. The goal is to find the elusive "end-user buyer," who is willing to pay top dollar for that ideal domain you are holding onto. This group is therefore worthy of the cost associated with renewals; in fact, such renewals should be done in year multiples to avoid some unpleasant surprises when e.g. a credit card expires.
The second group of domains can be perceived as middle-risk investment; its value does not increase as quickly, and whether it's a two-word descriptive domain, or a brandable, you are gambling money against time for the domain to become appreciated and sought after for its perceived qualities. At the same time, such domains are prone to being challenged by alternatives: domains that might as well do the job for their prospective buyer.
In a nutshell: By leveraging equilibrium between the short-term and long-term investment portfolios, domain investors can maximize their ROI. By treating domains like stocks, it makes sense to let go of short-term investments once their lifespan has passed. Selling or auctioning off such domains in the secondary market is a cinch: there's the Uni Market, Afternic, and GoDaddy auctions for that task.