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Welcome to Investing Made Simple. Lennar Investor Marketplace is an innovative platform that's transforming the way people buy and invest in new construction. Find rental ready new homes for sale across 90 plus desirable markets nationwide alongside institutional quality rental comps and local area insights. In addition to pre inspected home listings, Lennar Investor Marketplace consolidates all the information you need into one place, real time rental cost comparisons, neighborhood demographics, local school scores, projected expenses and appreciation forecasts. Each listing comes with a pro forma specifically underwritten for single family rental opportunities. Lennar's underwriting tools also include a calculation that gives you an estimated NOI and expected return as well as an automated rent valuation model tailored specifically for new homes, helping you forecast rental income accurately. Lennar is one of the nation's most trusted homebuilders with more than 1.5 million happy homeowners across the country. Lennar builds new homes for every stage of life, including first time home buyers, those looking for a larger or higher end home, and active adults ages 55 plus, making it possible to find a home for every buyer type and at every price point. Get started today@lennar.com that's L E N N A R.com find the investor marketplace under Shopping Tools Present or future market conditions are not guaranteed. You should consult your own accounting, legal and tax advisors to evaluate the risks, consequences and suitability for any real estate transaction. You've heard me talk about BILT as the loyalty program that lets you earn rewards on rent wherever you live, and they've just leveled up even more. As of 2026, homeowners can also earn up to 1.25x points on their mortgage payments. This is thanks to Bilt's three new credit cards, the Palladium Card, Obsidian Card and Blue Card. All three turn your housing payments, rent or mortgage into flexible rewards so you can choose the card that fits your lifestyle without missing out on points and exclusive benefits. BILT points can be redeemed at top airlines and hotels, Amazon.com purchases, future rent payments and more. BILT points have also been ranked by top publications as the industry's most valuable point currency. Your housing payment is already your biggest expense. Make it your most rewarding. Find the card that fits your lifestyle and apply today at joinbilt.com radicalwealth that's J-O-I-N-B-I-L-T.com radicalwealth make sure to use our URL so they know we sent you. Terms and limitations apply, subject to approval and eligibility. BILT cards are issued by column n a Member FDIC pursuant to license from MasterCard International, Inc.
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The information in this podcast is for educational and entertainment purposes only. Nothing here constitutes financial, legal, tax or investment advice. Welcome to the Paul Morris Podcast. In this episode, I'm going to run you through a deal. I looked at this. This is a real deal. It was an $850,000 duplex. I looked at it this week. Duplex, two units they were renting at roughly $3,500 per unit. On paper it looked pretty solid. And then I ran the numbers at today's mortgage rates, about 6%. And here's what actually happened and whether I'd buy it. When I ran the math on this particular duplex, it was getting a 5 cap. And what a 5 cap is, it means that you're getting a 5% return on the amount of capital that you put into a deal. Very simply, what that means is if you bought $1 million property, this one was $850,000. But the math is going to be a little bit more complex. So if we use the round number of $1 million purchase, if you're net at the end paying all of your bills, you're paying your mortgage, you're paying all of the utilities, upkeep, you've got a vacancy rate, insurance, every single cost and you net out a total of $50,000. $50,000 on a million dollar cash purchase is going to produce a 5% rate of return. That is by definition a 5 cap. That's what investors talk about when it's a 5 cap. If it's a 10 cap, it's 10%. Finding a 10 cap is going to be nearly impossible to do, especially in a market like Los Angeles. You can find higher than a 5 cap in some areas, even in LA. But you know, this particular duplex was actually in a great area. So 5 cap is not bad, especially historically. Now the question really is, can you buy a 5 cap when the interest rates today are 6%? Would that still make sense? Because you're paying 6% on the money that you borrow, you're only getting a 5% return. So the shortest answer is no. But there is a way to make it work. If you're not over overpaying and you're also not hoping that rates will save you later, that particular deal will only work if you can add value or if you can increase the rental rates. And in this particular property you can do both. So that's why it makes it a potentially interesting purchase. So if you're looking at something that is a 5 cap and the interest rates are 6%. As soon as you borrow money at 6% and you're only getting a 5% cap cash on cash return, you're going to amplify the downside. Conversely, if you were buying a 5 cap when interest rates were 3%, that that delta between 3% the cost of money and the 5% that you're getting on a cash on cash is going to really increase your rate of return. Because you could put down 20% that's used this million dollar purchase again, or let's even say you put down 30%, that 30% is going to be $300,000 on a 5 cap. You're going to get 5% on the 300,000 that you put down. You're going to borrow $700,000 at a 3% rate and you're going to get a 5% return on that 700,000 less the 3% that you're paying for the money. So it's going to give you a 2% net net gain on the $700,000 portion of that purchase. So what you end up getting is you get the 2% on the $700,000, which is 14,000, and then you get 5% on the money that you actually put down. That's going to be $15,000. So you've got $14,000 plus $15,000. That gives you $29,000 return on your $300,000. It doesn't take much math to realize that you're very close to a $30,000 return on your $300,000 that you put down. That takes you all the way from a 5 cap to 10% return on your money. So that's where leverage that 3% interest rate makes such a big difference. It's going to essentially double the rate of return on the purchase that you've made. Now if you didn't get a 30 year loan, you got a five year loan. Now you've got that same piece of property, that's $700,000. It goes to 6% and you're actually going to be losing 1% on the $700,000 that you've borrowed. So that is $7,000. Now you take that $7,000 and you take that out of that comes as a deduction from the $15,000 that you're getting on the $300,000 that you put down. That takes your effective rate of return down significantly, takes it down almost 50%. Again, it's easy math. You're down to just over a 2.5 cap instead of the 5 cap that you bought it at. So now the question is, why in the world would I be looking at this $850,000 duplex that's only bringing in $7,000 a month? That, that gives you a 5 cap by the time you take out, you take out all of the costs associated with a property. And we did all of that math and it returns roughly 5%. And if you're borrowing at 6%, it's never going to make sense. So why in the world would we buy this duplex? And there's two great reasons that we're seriously considering this duplex. Number one, the $3,500 a month rent, believe it or not, is a fair amount below market. These duplexes are large duplexes. They're in a great area of town and you can get really probably $4,500 at market rate for it. Now, you know there is rent control that makes it more complicated, but these are short term tenants, probably not going to stay forever. So you can count on some price increases in the rent. You're also allowed a 3% rent increase. There's room for that because these units are below market. So you've got a built in cushion at your, at your 5 cap with a 6% interest rate. You're going to be losing some money
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at first for sure.
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But you've got that built in. You've got that built in difference between the rents that are currently being paid and the market rent. How do you get there? You get there over time with an allowable 3%. And then also if and when these tenants move out, you can bring it back up to market rate. That's going to afford you a bit of comfort. Still not a purchase I'm going to make that's too tight. Now again, why am I still considering that? And that is because this duplex is on a large lot. That makes a big difference. The same exact duplex with the same exact rental profile on a smaller lot. Not something I'm going to buy, but because this is on a large lot, there are room for two fairly large ADUs. ADUs are allowable under law. So you could build two accessory dwelling units and you can get, you're not going to get the same amount of rent for the ADUs as you will for the duplex, but you could count on 2500 to $3000 rent for those. Of course you have to, you have to take it through permit and building. There's a cost to build. You've got to, you've got to figure that all out. But at the end of the day that does price out. And then you're adding approximately an additional $6,000 to your monthly rent of $7,000, which it is right now. So taking it from $7,000 a month rent to $13,000 a month rent, almost doubling the rent. And then you can get some price increase on the current renters right now. If one of them move out, you could move all the way up to market rates. Now it's starting to sound like a deal that really makes sense. This is not, this is not a screaming purchase, you know, where you're going to make a lot of money and retire on. But it is exactly the sort of investment that I look for for because it's in a great neighborhood. And that great neighborhood is only going to appreciate in my opinion. That's where I see the future of this neighborhood. And you've got some rental cushion. You also have a large enough lot that you can build two ADUs. So you can go from two units to four units at the same $850,000 price. So you can build those units somewhere between 200,000 and $250,000 a piece. If you build them at $200,000 a piece, you're now at 1.25 million. And that's going to take you down to a $325,000 per unit price instead of the $425,000 per unit price when you bought the duplex. So again, there's some real built in flexibility here. Even just the way it is, you would go into it losing a little bit of money. I, I personally would go into, I'd pay a little bit more and I would go into a 30 year loan. It might be slightly more expensive, but that's going to protect me from the rate shock that happened to the people that, that got 3% mortgages several years ago. If they paid a little bit more at that point in time, like I did, I bought during that time instead of paying 3% like many people did. I paid 3 and a half percent, 3.75%, but I got 30 year money. That 3.75 is looking very, very good right now. So our interest rate's going to double to 12%. Highly unlikely, but I'm still going to pay a bit more. Because I'm conservative, I'm going to pay a bit more. And if I have to go 6.25 instead of 6% in order to lock in a 30 year mortgage, I'm going to do that. Especially because people don't think they're not predicting that interest rates are going to go much, much higher. So that spread between a 7 year adjustable and a 30 year is not going to be that great. If I can't pencil in that additional cost for longer term money, even if it means me losing a little bit money, a little bit of money per month, that's okay. I'm going to buy into that security. And this is actually a duplex. That's that I'm very serious about buying. So real deal in Los Angeles, a market that people say is too expensive and in a very good neighborhood where people say this is too expensive to find a deal. By the way, this is not a screaming deal, this is not a steal. You can find this sort of deal on the market. But you gotta be very careful when you look at them. You want to have built in potential upside. The two. Again to review, the two pieces again to review. The two pieces of built in upside are that they are rented below market. You know, the naysayers who watch this, the people who pass this deal up are going to say, well, it's rent control, the people are going to stay forever. Yes, true. You also can get 3% per year rental increase by loss. You are allowed to increase it a little bit. That's going to create a cushion. I don't believe the tenants are going to stay forever because they're, they're young people, they've been in the units for a short amount of time and it's really a neighborhood that turns over quite a bit. So I don't see people staying forever. Obviously they could additionally you have another potential upside and that is build ADUs. So on a purchase like this, the way that I do things, especially if I'm not using other people's money, if I'm using my own money, this is a buy and hold. And then, you know, increase the rents 3%. Be nice to the tenants. I'm not trying to force them out and then figure out, you know, when do I have the money, when do I have the time to build two ADUs? I'm going to eventually do that. This is a buy and hold for my own portfolio. If I'm doing this for, for our real estate fund, then I'm really looking at, I'm doing a much more careful pro forma. I'm looking at the 3% per year increase that I can get by law. I'm definitely going to be conservative about it and I'm going to raise the money right now to do the ADUs. Right now because I need that advantage for investors in order to make it a great deal for them and in the present, not just the future. So that's my take on a real deal in Los Angeles, California that I am seriously considering buying. I hope this running through this exercise has been a good exercise to help you understand how I underwrite deals and what I think is a good, not amazing purchase, but one I'm still willing to make. And definitely leave me comments. Tell me what you think. Is this a deal you would do? Why would you do it? Why would you not do it? Give me some feedback and also happy to answer questions. Drop them in the comments below. And thank you for listening to the Paul Morris Podcast.