Radical Wealth Plan – Episode Summary
Podcast: Radical Wealth Plan
Host: Paul Morris (with Joey Sakovich)
Episode Title: The 3 Stress Tests Every Real Estate Deal Must Survive
Date: January 20, 2026
Episode Overview
In this episode, Paul Morris and Joey Sakovich break down the essential process for analyzing a real estate investment deal, emphasizing the three critical "stress tests" that every property must survive before purchase. Designed both for newcomers and seasoned investors, the conversation cuts through complexity by focusing on practical frameworks and real-world examples. The episode dives into deal underwriting, value-add strategies, and, most importantly, the methods for protecting against the most common (and costly) deal killers.
Key Topics & Insights
1. Setting the Current Real Estate Context
[00:14–02:03]
- Interest rates have doubled in the past five years (now 6–7%), dramatically changing deal viability.
- Residential mortgages are usually 30-year fixed; commercial loans are typically much shorter (5, 7, or 10 years).
- Many investors bought properties that "worked" under old rates, but are now in trouble as rates reset.
2. The Essential Deal Analysis Spreadsheet: The Eight Elements
[01:27–01:53] Paul lists eight numbers every investor should use to analyze a deal:
- Gross rent
- Vacancy rate
- Operating expenses
- Net operating income
- Debt service
- Cash flow
- Cash invested
- Cash on cash return (sometimes referenced as cap rate)
Quote:
"Not all eight of them are very complicated. And there’s only eight." — Paul [01:17]
3. Why Most Investors Lose Money
[01:53–03:02]
- It's rarely about buying in the wrong neighborhood; it’s about buying "a bad deal that looked good on the back of a napkin."
- Underwriting reality, not optimism, is crucial for deal survival.
4. Framework vs. Advice: Underwrite Reality, Not Optimism
[03:09–03:45]
- Ignore pro forma appreciation — if the deal needs appreciation to work, don’t do it.
- Focus on cash flow and value-add opportunities.
Quote:
"If the deal doesn’t make sense without appreciation, I’m not doing the deal. That’s one of the things: define the win." — Paul [03:28]
5. Value-Add is the Path to Protection and Profit
[03:48–06:58]
- Value-add strategy: Buy properties that need improvement, not "done, done, done" at retail pricing.
- The renovation budget creates a pricing buffer. If the market drops right after you buy, your improvements can still generate equity and possibly maintain your profitability.
Anecdote:
Paul describes buying the "Ugly Duckling" in a hot market, instead of the finished product. When the market corrected, the retail buyer got hurt, but Paul’s renovation budget allowed him to maintain or even gain equity.
Quote:
"That’s what protects me. And that’s why I always say that I make the money on the buy." — Paul [08:48]
6. Defining Each Line Item — The Eight Essentials
a. Gross Rent
[10:39–11:43]
- Simply the total rent collected (monthly or annually).
b. Vacancy Rate
[11:43–13:32]
- Always include a vacancy assumption (at least 5–7%) — even in hot markets. One turnover can mean several months empty, especially in small properties.
Quote:
"You still have to work in at least a 5% vacancy. Here’s why: Somebody is eventually going to move out and you’re going to have to paint and you’re going to have to make it." — Paul [11:21]
c. Operating Expenses
[13:32–15:53]
- Use the real number, not the "fantasy number" from the broker’s packet.
- 30–35% of effective rent (after vacancy) can be a good rule of thumb unless the building is new.
Quote:
"I’m going to tell you, when people put the package together, it’s the fantasy number... I call that all fantasy. ... How much have I spent total in the last 18 months? Divide that by 18 and give me that number. Reality." — Paul [14:06 & 14:54]
7. Cash Invested, Cushion, and Value-Add Budgeting
[15:56–18:48]
- Paul puts more cash down (30% vs. 25%) and adds additional cash to cover future improvements and operational cushion.
- Avoid buying fully improved properties at retail unless you’re aware of the risk in downturns.
- Capital allocation examples:
- For a $1M property, put 25–30% down, reserve $200K for improvements, plus ~$50K as an operational cushion.
Quote:
"I want to have a cushion because I’m not buying that property that is in A+ condition because I don’t want to end up like the guy that bought at the top of the market with no room to move." — Paul [16:15]
8. The Three Stress Tests Every Deal MUST Pass
[20:49–33:26]
1. Vacancy Stress Test (COVID as an Example)
[20:49–22:47]
- Ensure your numbers work even with higher-than-average vacancy.
- Properties in high-demand neighborhoods and entry-level price points are more resilient.
Quote:
"Here's what entry level into a great neighborhood is: you have the nicest unit for the least amount of money into a great neighborhood. And when you've got that, you have lots of demand." — Paul [21:17]
2. Expense Shock Stress Test
[23:26–29:32]
- Prepare for unexpected large expenses: roofs, plumbing, electrical.
- Solve this by line-item budgeting, due diligence (e.g., sewer scopes), and building expenses into the model over a few years.
Quotes:
"I put it in line item by line item. So I buy the Ugly Duckling building, I get the roofer up there... I'm putting it into the 2, 3, 4 year category." — Paul [26:44, 29:05]
3. Rate and Refinance Stress Test
[29:44–33:26]
- Don't rely on short-term loans (5, 7, 10 year); always plan for interest rate increases.
- Fixed, long-term debt is safer—even if it costs a bit more.
- Always question whether your deal can survive a rate hike or a need to refinance in a tough market.
Quotes:
"The last stress test is the rate and refinance stress test, which people did not take... I do not have a crystal ball. And I will tell you, five years ago when rates were 3%, I was getting 30 year." — Paul [29:44, 30:39]
Notable Quotes & Memorable Moments
- "We make money on the buy." — Paul [08:48]
- "Most investors... lose money because they bought a bad deal that looked good on the back of a napkin." — Paul [01:53]
- "Underwrite reality, not optimism." — Paul [03:09]
- "Expense shock stress test is just go line item by line item. ... I’m treating it like it's happening now or... budgeted into the next three years." — Paul [33:02]
Timestamps for Key Segments
- The Eight Essential Numbers – [01:27–01:53]
- Value-Add vs. Retail Example – [03:48–09:02]
- Vacancy Rate & Realistic Assumptions – [11:43–13:32]
- Operating Expense 'Fantasy' vs. Reality – [13:32–15:53]
- Three Stress Tests – [20:49–33:26]
- Vacancy – [20:49–22:47]
- Expense Shock – [23:26–29:32]
- Rate/Refinance – [29:44–33:26]
Episode Tone and Takeaway
Paul Morris brings a practical, straightforward tone—eschewing theoretical optimism for hard-earned, reality-based frameworks. The advice is approachable yet rigorous, illuminated by real-life deals that went wrong for others but right for him due to careful upfront planning and disciplined "stress testing." Joey Sakovich’s interjections ground the conversation in common investor concerns and reinforce Paul’s methods.
Final Note:
If you internalize and routinely apply all three stress tests to every real estate transaction, you’ll protect yourself from the mistakes that sink most investors—even in challenging market conditions.
Listen for: Concrete steps, detailed explanations, and clear, repeatable frameworks—so you can analyze deals like a pro and survive any market.