Co-location web hosting is similar to unmanaged dedicated server hosting, with the crucial difference being that the server is owned by the client and not the hosting provider.
Therefore over time co-location hosting can be a much cheaper alternative to dedicated server hosting as you do not have to pay for the rental of the server, just the space it takes up, it's power consumption and bandwidth. Most web hosts which offer a co-location service charge fees based on the rack space taken up, and charge per GB of data-transfer which is generally booked in the same way as a normal web hosting service plan.
You should ensure that your server is rack mountable since these are the only type that are accepted by most web hosting providers and data centres, and that you have the necessary knowledge to manage your own server before co-locating it as co-located server hosting normally comes with very little support. One other issue you will have to sort out with your hosting provider is that of access to your server, they can't deny you access but they may have restrictions on time, which could cause angst if you have a problem out of hours.
In conclusion, co-location web hosting is a form of dedicated server hosting, where you own your own server, in addition to all the benefits of dedicated server hosting, you have more freedom to modify the server, because you own it, the level of technical expertise required is much higher than for instance managed server hosting, but once the server has been purchased the associated costs are much lower.
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