The key is what today's reality is vs 24 months ago. If you are buying a stabilized asset with good debt service coverage you can get GSE financing at great rates and with higher leverage if it meets their underwriting criteria. I would not expect a local bank to get anywhere near 80% LTV today, you are looking at more like 50-65% LTV currently for even performing assets. If you buy all cash and expect to refinance later (near term) you better make sure that it will fit with Fannie or Freddie and even local bank underwriting criteria before you buy it, otherwise you might have to hold it all cash indefinitely which is fine if that is your strategy.
The advantage of all cash in today's market is simply this: You can provide a seller a certainty of execution/closing, you can probably get a better price as a result, and you can close faster with fewer transaction costs which is good for both sides.
There is some merit (comfort) to having a deal pass through what are now tougher underwriting standards (and appraisal even though they are sometimes out of touch and somewhat arbitrary depending on the appraiser) if you get a loan as well. The downside is that if you have a financing contingency in todays market you will be in less of a position to actually get a deal under contract if there are other buyers with more experience, lower debt expectation on their offer/contract, bigger name, and certainly if you are going up against all cash buyers, etc.
The advantage of using debt is that it can enhance your return on a performing asset as your criteria is probably a cash on cash return of 9-11% on invested capital and with debt rates in the 5.5-7% range it has a lower threshold than your equity (cash) parameters and helps you get closer to that cash on cash target by using it on a performing property. Put it on a spreadsheet and play with debt LTV levels at current rates, current NOI, and the effect on cash on cash return and you will see (amortization period factors in too).
Keep in mind that Equity (cash) sits at the top of the capital stack and if the deal goes south the first part to get chopped is the equity as the debt is a first lien so there is risk in debt and increases with the higher LTV if your property becomes less of a performer at any time during the hold.
If you purchase a property for all cash and it covers its expenses and replacements there will be cash flow (return) and you won't care too much about what market values are in the short term if you are a long term holder. If you buy a property on a true 9% CAP and keep it there the return on a cash purchase will be 9%, if you raise the operations it goes up from there. You will not have the burden of the debt hurdle to reach every month that puts more stress on your occupancy, rents, etc.
One of they keys will be deferred maintenance and ongoing replacements (reserve) or if you plan on renovating the property. In that case your all-in-cost will be for a higher dollar amount than the purchase price (thus changing your Loan to Cost) and needs to be factored into any return calculations. Even on 80% LTV deals that I have done, with rehab my debt to all-in cost has always been closer to the 55-65% range after renovation depending on the amount of capital spent on the renovation.
I hope that helps answer your question.
MB 35, LLC
Dec 4, 2009