In Detroit’s multifamily market, some investors are deliberately acquiring properties that produce no monthly income – and consider them profitable. Larry Gotcher, a real estate professional with Resource Realty Group currently pursuing nine apartment complex acquisitions in Detroit ranging from 100 to 500 units, says the strategy relies on tax code mechanics that most investors overlook.
The core argument: a property that breaks even after debt service still generates after-tax wealth through depreciation deductions, and that wealth compounds when combined with long-term appreciation. Gotcher says the approach works particularly well in Southeast Michigan, where decades of supply shortages and persistent rental demand reduce the vacancy risk that would otherwise threaten a break-even model.
Why Breaking Even Is Not the Same as Losing
Gotcher argues that the conventional focus on immediate cash flow causes investors to dismiss deals that are genuinely profitable over time. “If you’re breaking even every month, and at the end of the year, cash wise, the depreciation alone makes it worthwhile,” he says.
The mechanics rely on the IRS depreciation schedule for residential real estate, which allows investors to deduct the cost of a building – not the land – over approximately 27.5 years. On a $1 million property, that translates to roughly $36,000 in annual deductions that reduce taxable income without requiring any cash outlay. When stacked against a property that is also appreciating, the after-tax return looks substantially different from the monthly cash flow statement.
Gotcher says most investors evaluate deals on the wrong time horizon. Monthly cash flow is visible and immediate; depreciation benefits and appreciation are not. That gap causes investors to walk away from deals that would serve them well over a longer hold. “The more real estate you own, the better off you are,” he says – a statement reflecting his conviction that accumulation, not optimization of individual deal metrics, drives long-term wealth in real estate.
Southeast Michigan as the Testing Ground
Gotcher’s acquisition activity in Detroit is central to this strategy, not incidental to it. He describes Southeast Michigan as a market defined by structural supply constraints and high rental demand, with waiting lists at existing properties. “There’s a huge demand, there’s been huge lack of supply in southeast Michigan for decades,” he says. “Investors all over the country target southeast Michigan for that exact reason, because of the shortage of rentals and the high demand.”
That demand profile matters for the zero-cash-flow strategy because it reduces vacancy risk – the primary threat to a break-even underwriting model. A property that loses a tenant and sits vacant for several months can shift from break-even to cash-negative, eroding the tax benefits that justify the approach. In a market with persistent waiting lists, that risk drops.
Gotcher also points to appreciation as a necessary component of the thesis. He argues that buying into a supply-constrained market with strong employment anchors – including the University of Michigan and its hospital system – provides a reasonable basis for expecting continued value growth. He describes Ann Arbor as nearly recession-proof due to these institutions, noting that properties there held their values through 2008 while surrounding markets dropped.
How This Changes Deal Evaluation
The standard multifamily underwriting model screens deals primarily on debt service coverage ratios and immediate cash-on-cash returns. That framework systematically excludes properties that are profitable on an after-tax basis but show zero or negative monthly cash flow. Gotcher says that exclusion benefits investors who understand depreciation mechanics, because it reduces competition for assets that appear unattractive on the surface.
He has removed cap rates entirely from his marketing materials for a related reason. Gotcher says 95% of buyers were looking only at cap rate and not examining deals further – particularly value-add properties where current performance does not reflect future potential. By eliminating the metric, he forces prospective buyers to engage with pro forma analysis and cash flow projections rather than screening deals out on a single number.
“A lot of people do math and will only buy certain types of properties with certain cap rates,” Gotcher says. He points to the difference between buying in Ann Arbor – where turnkey properties trade at 2% to 5% cap rates and lose money initially if financed – versus adjacent markets like Ypsilanti, where investors can finance a property and still have positive cash flow immediately. Both can be sound investments, but only one passes the conventional cap rate screen.
For buyers waiting on the sidelines for interest rates to fall, Gotcher’s response is direct: rates will eventually come down, but property values will not come back down with them. He points to the long-term trajectory of American real estate values, noting that downswings are rare and temporary while appreciation compounds over decades. Investors who wait for perfect conditions on every metric, he says, are the ones who miss the accumulation window entirely.
About Resource Realty Group: Resource Realty Group is a full-service commercial and residential brokerage headquartered in Ann Arbor, Michigan. Led by Owner and Broker Larry Gotcher, the firm works with a ten-person team and operates a real estate investment trust focused on income-producing real estate in Michigan and select markets. Learn more at resourcerealtygroupmi.com.
Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.
