The Paul Morris Podcast – Episode 5: “Cap at 6% Interest… Does This Deal Make Any Sense?”
Date: March 9, 2026
Host: Paul Mark Morris

Episode Overview

In this episode, Paul Mark Morris dives deep into evaluating a real-world investment opportunity: the potential purchase of an $850,000 duplex in Los Angeles. With today’s 6% mortgage rates, he scrutinizes whether the deal makes sense at a 5% capitalization (cap) rate. Paul walks listeners through the math, explains the impact of leverage, and shares his personal investment criteria, highlighting how even a “tight” purchase can still be a worthwhile long-term hold if there’s potential for adding value or increasing rent.

Key Discussion Points and Insights

1. Introducing the Deal & Cap Rate Fundamentals

[03:00 – 05:00]

• Paul examines a real duplex he’s considering: purchase price $850,000, two units each renting at $3,500/month.
• He breaks down what a 5% cap rate means: If you buy a property for $1 million and net $50,000 after all expenses, that’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.” (Paul Morris, 04:10)
• In good areas, a 5 cap is historically decent.

2. Do Cap Rates Make Sense in Today’s Rate Environment?

[05:00 – 07:30]

• The critical question: Does a 5 cap make sense with 6% interest rates?
• “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.” (Paul Morris, 05:25)
• Explains that unless you add value or raise rents, the numbers simply don’t pencil out.
• Contrasts with the leverage effect at lower rates: If interest is 3% and you’re getting a 5 cap, leverage drastically boosts your returns.

3. The Power (and Danger) of Leverage: Real Numbers Example

[07:30 – 09:30]

• Walk-through of the math: If you put 30% down ($300,000) on a $1 million property at a 5 cap, and borrow $700,000 at 3% interest, you get a much better overall return.
• “That takes you all the way from a 5 cap to 10% return on your money. So that’s where leverage at 3% interest rate makes such a big difference.” (Paul Morris, 08:50)
• If the rate on your loan jumps to 6%, you start losing 1% on the borrowed amount, slashing your effective returns.

4. Why Consider Buying This “Tight” Duplex?

[09:30 – 12:30]

• Two key upsides:
  1. Below-Market Rents: Current $3,500/month is well below current market (~$4,500).
  2. Upside Over Time: With annual rent increases (3% allowed under rent control) and tenant turnover, future cash flow should improve.
• “There’s room for that because these units are below market. So you’ve got a built-in cushion at your 5 cap with a 6% interest rate. You’re going to be losing some money at first for sure.” (Paul Morris, 10:15)

5. The Big X-Factor: Additional Units via ADUs

[12:30 – 15:00]

• Property is on a large lot with potential for two ADUs (Accessory Dwelling Units).
• Adding two rental units (at $2,500–$3,000/month each) could nearly double monthly rent from $7,000 to $13,000.
• “Taking it from $7,000 a month rent to $13,000… now it’s starting to sound like a deal that really makes sense.” (Paul Morris, 14:00)
• Building ADUs isn’t free—permits and construction will cost $200,000–$250,000 each, but this significantly improves per-unit economics.

6. Choosing Security Over Short-term Cash Flow

[15:00 – 17:30]

• Paul prefers a 30-year fixed loan—even if rates rise slightly—instead of risking a future rate spike on a shorter-term adjustable loan.
• “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… I’m going to buy into that security.” (Paul Morris, 17:10)

7. The Real Investment Criteria: Potential vs. Perfection

[17:30 – 20:00]

• Paul reiterates this isn’t a “screaming deal” or 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.” (Paul Morris, 18:11)
• Built-in upside comes from both under-market rents and potential to expand the property.
• Describes this as a classic buy-and-hold move, either for his own portfolio or—if using investor money—by proactively building the ADUs to optimize cash flow early.

Memorable Quotes & Notable Moments

• “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.” (Paul Morris, 05:25)
• “That takes you all the way from a 5 cap to 10% return on your money. So that’s where leverage at 3% interest rate makes such a big difference.” (Paul Morris, 08:50)
• “Taking it from $7,000 a month rent to $13,000… now it’s starting to sound like a deal that really makes sense.” (Paul Morris, 14:00)
• “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… I’m going to buy into that security.” (Paul Morris, 17:10)
• “You want to have built-in potential upside… 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. But, you also can get 3% per year rental increase by law.” (Paul Morris, 18:14)
• Invitation for feedback: “Tell me what you think. Is this a deal you would do? Why would you do it? Why would you not do it?” (Paul Morris, 19:40)

Timestamps for Key Segments

• [03:00] Introduction to deal & cap rate discussion
• [05:25] Does a 5 cap make sense at 6% interest rates?
• [08:50] Example: How leverage at low interest amplifies returns
• [10:15] Below-market rents: why this offers opportunity
• [14:00] ADUs: Doubling income and transforming the deal
• [17:10] The value of long-term fixed debt security
• [18:11] The importance of built-in upside and real investment criteria
• [19:40] Listener engagement & request for feedback

Conclusion

Paul Morris delivers an unfiltered, math-driven look at buying value in a tough market. He unpacks when a deal that looks mediocre on first glance—like a 5 cap at a 6% mortgage—can be justified by real, actionable upside opportunities: namely below-market rents and the ability to add value through property expansion. He champions strategic patience, security in financing, and the discipline to wait for true upside, not just rely on future rate cuts or blind optimism.

Listeners walk away with a practical case study in “real world” underwriting and deal analysis, along with a challenge: Would you do this deal? Why or why not? Leave your thoughts for Paul to discuss next time.