Cash vs. Financing ROI For Buy and Hold Multifamily?

[Craig S.]

Hello,

I would like to know others "expert/professional" opinions on Cash vs. Financing for long-term buy and hold multifamily properties. I am aware of most of the benefits (pros/cons) of paying cash, however I am not as in-tune to the more advanced benefits for financing. Below I will start a brief bullet point list with the most notable items that come to my mind, however can someone give me a good argument why financing is better?

I guess the basis of my question really comes down to "what is a better financial return", however looking purely at numbers sometimes is also misleading and other economic factors come into play (like risk tolerance, etc.). And just to clarify, my question has nothing to do with negotiating a new deal and whether it is better to make cash offers or finance--this question is purely regarding what is better for a long-term buy and hold strategy.

And one other caveat if you will, it is my belief that real estate investing can either be an Investment or a Business. My personal philosophy is that if it is an "investment", then the important rule applies--always protect the principal. However if it is a "business" then more risk tolerance is acceptable. It is my personal goal to continue "investing" in real estate, though I have recently brought on 3rd party management and I don't plan for multifamily real estate to be my sole/main income source for growth. If it was, maybe I would be willing to accept a bit more risk as you need to tolerate risk sometimes to grow more rapidly. For me, because I view RE as more of an "investment" it is my goal to protect the principal--though I want to be smart about it and thus the reason why I really want to understand all the pros/cons of Cash vs. Finance for buy and hold to maximize my results.

CASH

Pros of cash holdings:

• Minimizes risk in down economy
• Maximizes pure cashflow on the property
• Don't owe anyone anything, freedom mentality
• Keeps the options wide open (you can always finance and pull equity out, use as collateral, etc.)
• Don't have to worry about a bank calling the loan due or something unusual, especially in a recession or tight economy

Cons of cash holdings:

• Ties up a lot of equity that could be used for other deals
• Potentially risks the capital in the property (if sued for example, it is easier to go after equity in the property than a bank loan)
• Potentially limits ability to grow (more capital tied up into deals rather than ability to acquire more properties)
• Possibly losing some tax benefits of interest deduction, amortization, etc.

FINANCING

Pros of financing holdings:

• Ability to possibly increase ROI, cash on cash, IRR? If someone could shed more light on this I would love to know more from other "experts" to see how this plays out upfront and over time. Could I get a much better rate of return by financing?
• Ability to have less "risk" in the deal due to less capital tied up
• Ability to conserve more cash for other deals/growth
• What else am I missing here?

Cons of financing holdings:

• Having the mentality that you are "owned" by someone (the bank) and worry in the back of your mind they are ultimately in control
• In a severe down economy you could be underwater and risk the property (though maybe this could be avoided by not being over-leveraged)
• More administrative and accounting work (though this is probably a very small point in the big scheme of things)
• Paying 4% interest rate takes away from the return? (Maybe this isn't necessarily true?)

Oh, and in the markets I invest, they aren't big appreciation states, so that isn't something I heavily factor in

I am really curious to hear others advice/recommendation/opinion and pros/cons of financing properties. I understand cash pros/cons fairly well, but really want to understand the financing route better.

Thanks in advance for the help!