5 Year Loan with a Balloon? Too Risky?

[James G.]

Hi BP. I want to ask of everyone’s opinion on something that seems pretty risky. I’m a college student (no income) and owner financing is one of the few ways that I can purchase rentals. How does everyone feel about a 5 year loan with a balloon payment at 5 years? I’ll have a good job (engineer) in 1 year and I could refinance within a year and a half of having the property under my name. Can I do this? Is it too risky? 

I looked up that you can’t refi with a “federal tax lien.” Would the original owners have a lien on my property after closing until all of his money is payed (if yes, how would I refinance)? I know the market could crash any moment. Is this a bad time to do this? Or since I am so young, should I just go for it and really reach my full potential. Thoughts?

[Michael Seeker]

@James G. - If the property is a good investment and terms are reasonable, then the 5 year balloon should not be a hindrance to you.  I've been investing for years and all of my investment loans except for one are on 5 year balloons or shorter.  If you can demonstrate positive cashflow and a solid payment history, then you shouldn't have any problem finding a lender to do a refinance for you in a few years.

As for liens, a federal tax lien is related to non-payment of federal income taxes.  Doesn't sound like that has anything to do with the property you're buying.  The seller would hold a mortgage on the property which would be removed when he is payed off.  That occurs at the time of a refinancing and is done all the time, nothing complicated about it.

With regards to timing, there are always good deals to be found in high markets and bad deals to be found in low markets.  If you're buying with the hope of appreciation, then now is probably not the best time to do so.  If you're buying on strong cashflow, then the timing of the purchase with respect to the overall market gyrations should not matter.