A Money Lesson from My Dad

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I still remember the day my dad was so proud that he had just completed a great deal. He had gone to his credit union when they were advertising loans for some 4% or so for any reason for members. They also offered GIC or investment certificates for some 6%.

So, my dad did the basic math and decided to go to the credit union and get a $50,000 loan. He only had one need for the money. He turned around and returned it to the credit union for the same term as the loan. He was paying $2,000 a year in interest but was making $3,000 a year in investment income. He was profiting $1,000 before taxes.

It may not seem like much today, but listening as a child, I learned a great deal. $1,000 is a lot of money—back then and today.

The lesson was about arbitrage. You borrow money for one number and loan it or invest it for more. Depending on how you invest it, you may have different levels of risk. My dad had zero risk; the credit union was good for the loan. He had to pay taxes on his $1,000 gain but wasn’t making much back then, so I'm not sure he had to pay anything.

Some years ago, I was part of a credit union and saw the same opportunity as my dad experienced. When I met with the manager, he declined my request, saying it wouldn’t be fair to the other credit union shareholders. No one had thought of it, and no one had approached him for such an idea, so why should he do it for me?

I didn’t know it then, as I do now, but Envy is a critical destructive force in a small town with many stupid bank managers.

But when I look at my real estate career, arbitrage, as taught by my father, is the key ingredient to successful real estate investing. If a mortgage is offered at 5% and I am earning 14% on an investment into a property, is that a good deal?

That 9% gain on someone else’s money would make my dad proud.

Arbitrage is rarely taught today. It is a crucial strategy for investing at all levels to help people escape poverty and lack of economic opportunity. Once taught, providing reasonable loans for investment and business creation may be a government policy I could live with. Beyond an investment certificate, risk needs to be considered. I am comfortable using arbitrage to buy real estate but not so to buy most other investments.

If you have children at home, remember the power you have over what you teach them through your actions. My learning was observational. My dad didn’t set out to teach me about arbitrage; I was just lucky that he did.

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