Investors Beat Savers

By Bruce Firestone | Uncategorized

Jul 04

A client of mine, originally from Iran, invests in two things–his own operating business and real estate. He thinks financial services, bank products and insurance are for suckers.

When he first came to Canada with his beautiful family, his first visit was to City Hall where he asked, in his then broken English, a local planning bureaucrat over the counter where Ottawa’s growth would be strongest in the next ten years. The bureaucrat pulled out a map of the city and pointed to what would eventually be the Barrhaven Town Centre, not telling him that, at the time, it was a farm field. My friend and client bought a copy of that city map, got in his third hand car and drove to Barrhaven, which some locals disparagingly refer to as “Farrhaven”.


From the empty field, he called a major national pizza chain, based in the big smoke (aka Toronto) and asked to buy their franchise for the area. The guy in their real estate group thought he was crazy so, of course, he sold it to him right away taking almost all his lifetime savings in the process. Later, when the Town Centre was built, he got a key spot in the power centre for his franchise since the developer had to deal with him.

He worked every day for three years in that store along with his wife and three daughters. Every day for three years, they worked with a smile despite the fact that they lost money every day for the first two and a half years. If you were having a bad day, they’d buy you a free slice of pizza. That’s the kind of nice folks they are.

Eventually the store was making so much money, the national franchiser said, “We can’t allow that! We have to have another location there.” So they decided, after he and his family pioneered the market, to split it. That’s what big corporations do. PROFIT MAXIMIZATION, not for the entrepreneur franchisee of course, for them naturally.

His other investments fall into three categories–owning his own home, owning townhomes that he rents out (only) to his vast extended family at below market rents (more than made up for by 0 vacancies, 0 damage to his homes, 0 bad debt and 0 run ins with the RTA, the Residential Tenancy Act which allows bad tenants to destroy a landlord’s property, not pay rent for months and totally get away with it) and buying land because they aren’t making any more of it.

I sold him a piece of investment property (zoned industrial) in the south end of Ottawa not far from Barrhaven three years ago. Land is a low intensity investment. All you have to do is: pay your property taxes once per year, cut the grass every so often, keep people from dumping their trash on it, and not let the City back door you with some sort of idiotic downzoning that some fool city planner dreamed up to take your property rights away. Why should a city planner care? They have a secure job for life and look forward to a nice retirement with a fully defined benefit pension plan. I mean like they’re ok, right?

Anyway, the investment has matured and we just sold it for him. How did he do? Did he do better than the .7% his bank generously offers him on his savings account? Did he do better than 1.5% on a GIC? How about those mutual funds that promise 8, 10 even 12% (!!!) 7 and 10-year returns but never seem to deliver more than 2%? My private bank managed to turn $100,000 of my money into $92,000 using their mutual funds as an investment vehicle. This was during the biggest stock market boom (1995-2000) since the railroad-inspired one in the 19th century. A monkey throwing darts at a chart of mutual funds almost certainly would have done better. Hey, my mattress would have done better. Maybe he should have invested in life insurance, another channel that former Chief Justice of the Supreme Court of Canada (Bora Laskin) once called nothing more than a rip off of ordinary Canadians by giant companies. 

Here’s how he did:

1. he invested $104,175 of his money to buy 6 acres;

2. he leveraged his equity with $200,000 in borrowings;

3. he paid $9,000 per year in realty taxes and $13,000 in interest on his mortgage;

4. he sold it for $499,500 after 3 years;

5. he ended up with $271,078 in cash;

6. his rate of return as measured by IRR (Internal Rate of Return) was 22.1% p.a.

So he turned $104,175 into $271,078 in three years. If he had left his $104,175 with his bank in a GIC with compound interest of 1.5%, he would have ended up with $108,933.54 instead.



@ profbruce


Postscript: for real estate coaching or realtor services, contact Bruce M Firestone, PhD, ROYAL LePAGE Performance Realty broker 613.422.6757 x 250.

Postscript 2: you can safely download the spreadsheet for the above case study in .xls format from my server and see how I calculate his returns:

Postscript 3: here’s an excerpt from something I wrote about a place called Grassel where mensa ants are eating everyone’s lunch–

Grasshoppers, Squirrels and Ants in Grassel

Occupy Grassel Movement Picking up Steam/Government Planning Action


French economist Thomas Piketty in his work Capital in the Twenty-First Century shows that r, return on capital (world level), has ranged over recorded history between 4.2% and 5.4% pa while g, growth of world output, has ranged from near 0% to as high as 3.5%, averaging around 1% to around 1.5% pa. For all of that time r > g and for most of it, r >> g. Wages tend to track productivity, which is closely linked to g, overall growth, while wealth (asset values) tracks r; hence, the gap between rich and poor tends to widen over time.

This effect is magnified if the wealthy use low cost borrowing to leverage their returns. For example, a 4.8% pa return on capital can turn into an 8.3% pa return via borrowing. See my example below.

It also happens that the wealthy are likely to have greater access to sources of low cost financing so the gap between poor and rich will tend to grow much more quickly than a simple comparison between values of r and g would suggest.

Here is my sample calculation–

6-Jun-14 Return on Capital

Case 1 No Leverage

Capital Value $10,000
Equity $10,000 100%
Borrowing $0 0% 35 years 1.40% pa
r 4.80% pa
ROI $480.00

Case 2 Leveraging

Capital Value $10,000
Equity $2,500 25%
Borrowing $7,500 75% 35 years 1.40% pa
Borrowing ($272.52) per year
NOI $207.48
ROI $829.91 4
r 8.30% pa


Explained another way, investors almost always beat savers. In most nations, the top .1% control a higher percentage of assets than they do national income although they control in most cases amazing percentages of both.

The Story

The majority of the population of Grassel is made up of Grasshoppers, Squirrels and Ants. Mensa Ants account for 1% of the population. These are the groups that populate the World of Grassel, viz:


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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.