Fixer-upper.
RE investment is not how you perceive it. For example, the 1% rule of thumb*, or 2 %, have nothing to do with how you finance the property. It merely refers to the ratio of price to rent. Assuming 50% of rent goes to expenses, the 2% 'rule' gives a return on investment of 12% per annum.
lets take an example. I own a 100k house that rents for $2000 a month. Expenses ( property tax, insurance, maintenance) are $1000 a month. Ignoring vacancies, thats 12k per year pretax cashflow.
I have 1 property. So there is risk with concentrating all my equity in one house. Look what happens if I leverage.
With 20% down I instead buy 5 of these houses, all the same, for $500k. I pay 5% interest, fixed rate. That's 20k a year in interest payments. But I have 60k in cashflow (5 × 12k). My net cashflow is now 48k per year! Plus another 6k in principal repayments.
leverage has a powerful effect if the interest rate is a lot lower than your roi.
But, one might say, what if the market collapses like in 2008? A 20% drop means you've ' lost' all your equity! Yes, thats true, but these are fixed rate mortgages, so they can't call them. But I still own the properties and I'm still getting 60k of cash in rent, and can still pay the mortgages. In fact, thanks to the leverage, I have 5 houses, so even if vacancies go up, I'm in good shape.
Meanwhile, with 1 house, I would be ok on equity. Lost only 20k. But im very vulnerable to vacancy risk, as I still have to pay tax and insurances. If I can't pay those I can loose the house just as much to tax forclosure.
You seem to equate debt with risk, and that no debt equals no risk. This just isn't the case.
* rule is a house should rent for 2% of purchase price. Or 1%. Or inbetween. But not lower.
Your argument has some validity, but it also has a hole in it. If rent prices decline along with the property value, you're screwed with the levered properties. For the most part, rents are guaranteed by subsidies, but if those subsidies end, or there's a cutback in student loans, your neighborhood turns into a riot zone, the government actually stops illegal immigration, etc., you're at risk of having your monthly income be less than your payments.
I agree that no investment is risk free and that diversification is good, but debt will always be a two-edged sword. If this wasn't the case, companies with a high DTI wouldn't trade at a discount to those with low debt loads.
Your monthly risk of default on levered properties may be quite low, but the cumulative risk of holding debt for decades is much higher. I look at the cumulative risk, as I've been alive long enough to know that change, although gradual, is inevitable.
* a second hole in your argument is the necessity of paying insurance on an unlevered property. Not only is insurance optional, it's also cheaper since you don't need to pay for full replacement value to satisfy lending requirements.