What is the true return on your investment?

An owner of a small retail strip talked to me and said that if I could find him another property that gave the same return on investment as the one he already owned, he would buy it in a minute. He grinned when he told me that he bought his property 18 years ago for $375,000 and paid off his mortgage. He put $100,000 down on the property when he bought it and his income after expenses was now $100,000/year. I knew of his property and it was quite nice. He had kept his property in good repair and there were reasonably good tenants in property. I knew approximately what the property was worth and I told him that I would show him several properties with a yearly return of around 12.5% on his money invested. He looked at me with a blank expression and then he said "What are you crazy?". He said he invested $100,000 and each year he earned $100,000 and that's a return of 100% per year.

I explained to him that his property was worth approximately $1,100,000 . I told him if he sold the property today and paid off the capital gains taxes and other expenses such as commissions, attorneys fees and conveyance taxes, he would probably net around $800,000. He agreed with my sales analysis. I also told him that he really had $800,000 invested in the property and not $100,000 so his yearly return on investment was $100,000/$800,000 or 12.5%.

He stood there stunned for a moment and then he smiled and said "Yea, but my initial investment increased 800%". I said "You are right! When do you have time to look at some properties?"