Why Buying Below Replacement Cost Is Mike’s #1 Strategy Right Now

On Accredited Investors Only, host Peter Neill sits down with Mike Zlotnik to explore why buying existing commercial assets at deep discounts is the favorite strategy for today’s market. Mike draws on a career that started in technology, transitioned to passive real estate investing, and matured into running diversified commercial real estate funds. The conversation focuses on practical rules, financing realities, and how passive investors should think about risk and opportunity right now.

From tech to real estate: the evolution that matters

Mike’s path is familiar to many modern investors. After 15 years in technology, he started as a passive investor, learning appreciation strategies in coastal markets and later discovering cash flow, lending, and commercial assets. That progression led him to prefer larger, institutional-style investments where economies of scale create more predictable outcomes than dozens of single-family rentals.

Key takeaways from that evolution:

Start simple. Passive checks teach underwriting and patience.
Explore debt first. Hard money and private lending can generate double digit returns with lower active risk.
Scale through commercial assets. Multifamily, open air retail, and industrial offer operational leverage compared to hundreds of scattered single-family homes.

Why buy below replacement cost

Mike argues that the most attractive opportunities today are existing assets purchased at a steep discount to replacement cost. That position provides a margin of safety and a built-in upside, especially after the market repricing of the past few years.

“If you can get into these deals at these insanely good prices, then it’s almost like there’s still risk and everything, but it’s very difficult to lose money in the upside.”

Benefits of buying below replacement cost:

Built-in upside from the gap between purchase price and the cost to recreate the asset.
Immediate cash flow potential when deals are purchased at favorable cap rates relative to financing costs.
Lower execution complexity versus ground-up development, which still carries construction, entitlement, and timeline risks.

The cap rate spread rule: a single most important metric

Mike emphasizes one practical underwriting rule: the spread between the property cap rate and the cost of debt. In his words,

“If we can’t get 2% positive spread between the cap rate and the interest rate, we do not do the deal.”

Why this matters:

Positive spread means cash flow from day one after financing costs.
Negative spread leads to immediate cash drag and magnified risk if rents or occupancy dip.
Consider fixed versus floating debt carefully. Fixed rate buys stability; floating may be cheaper today but has counterparty and rate risk.

How Mike’s team structures deals and scales

The primary model is a capital partner approach. Rather than operating every asset directly, Mike’s funds partner with local, vertically integrated operators who bring execution expertise in specific asset classes and markets. This lets the fund achieve diversification without operational burnout.

Structure features to note:

Capital partner role—raise and deploy capital, perform due diligence, and monitor execution.
Vertical integration—work with specialists for industrial, open air retail, multifamily, and value add.
Programmatic deployment—repeatable relationships with operators reduce deal sourcing friction and improve reporting quality.

Which asset classes make sense now

Not all commercial real estate behaves the same in this cycle. Mike breaks down practical differences:

Multifamily—can be harder to reach high yields but offers scale; value add works if there is clear rental upside.
Open air shopping and industrial—often trade at stronger cap rates and can provide immediate cash flow with long-term leases.
Self storage—recession resilient in certain markets but highly dependent on local supply dynamics.
Private lending—an attractive, lower-friction way to earn double digit returns as a creditor in well structured deals.

Structuring for tax benefits and downside protection

Tax structuring and the capital stack matter. Mike highlights options investors should consider:

Bonus depreciation can be powerful for high earned-income investors needing tax offsets. Current rules and political shifts may change availability, so plan with advisors.
Preferred equity and mezzanine positions provide attractive risk adjusted returns and may offer downside protection versus common equity.
Government incentives and energy reimbursements can be stacked into returns when upgrades or efficiency programs are available.

A practical checklist for accredited investors

Use this checklist when evaluating opportunities or sponsors:

Confirm the cap rate to interest rate spread. Target at least 2 percent positive spread.
Validate purchase price versus replacement cost. Look for significant discounts to reconstruction cost.
Understand the capital stack. Know who is in first loss, preferred positions, and where depreciation accrues.
Assess the sponsor. Review track record, communication practices, reporting cadence, and the number of past deals with your sponsor.
Check market-level fundamentals. Is supply increasing? Are rents stable or growing? Midwest markets often show steadier rent behavior today.
Plan liquidity. Private real estate is illiquid. Make sure the capital is patient and aligned to the expected hold period.

When to consider ground-up development

Development can be attractive when construction slows and future supply looks limited. However, Mike prefers existing deeply discounted assets because:

Ground-up requires execution through construction risk and long timelines.
Discounts to land rarely offset the total cost to build.
Existing assets often offer immediate cash flow, depreciation, and a clearer risk profile.

Final takeaways

Markets have reset. For many investors that means opportunity, but it requires discipline.

Buy below replacement cost when possible. It creates asymmetric returns and a margin of safety.
Focus on cap rate spreads to ensure immediate cash flow and downside protection.
Partner with specialists to scale and avoid operational burnout.
Simplify your deals and prioritize liquidity and execution clarity.
Match structure to objectives—income versus depreciation versus growth will determine the right position in the capital stack.

For investors interested in diversified commercial strategies that include lending, open air retail, industrial, and multifamily, the current environment rewards selectivity, patience, and alignment with proven operators. When underwriting, put math before momentum and let the economics of the deal create the margin of safety.

Resources mentioned during the conversation include Big Mike Fund resources and syndicated fund structures for accredited investors exploring these strategies.