Highly leveraged for maximum return: good or bad?

[Dan Rivera]

Hi, I'm a value add, buy and hold, real estate investor from NJ. I own a cash-flowing 3-family as my primary residence, and am under contract for another 3-family. I have a private investor (family member) willing to get financing and contribute 100%. I'll take a slice of cashflows, expenses, and appreciation.

Question: If we have the opportunity to put down virtually nothing to acquire the property and fix it up by use of leverage, should we do it? It would require the use of an ARM, and a variable rate loan for renovations. Purchase price is 489,000.

Riskier option: 

$489,000 loan amount (30-yr 10/1 ARM @ 3.25% initial rate) (100% of purchase price)

$0 down payment

$3020 closing costs (12,800 - seller contribution of 2% of purchase price)

$100k variable rate loan at 3.6% (100% secured by cash already in account w/ lender). 

Cash flow: 6,750/year, or 563/month

Cash-on cash return = 223%

Safer option: 

$366,750 loan amount (30-year fixed @ 4.7% rate) (75% purchase price)

$122,250 down payment (25% purchase price)

$3,020 closing costs

$100k cash towards renovation (budgeted)

Cash flow: 17,667/yr, or 1472/month

Cash-on-cash return = 7.8%

The riskier option sounds like a steal to me, however, it does come with added risk. It is an ARM, so if we keep the property past 10 years, our rate could increase significantly. The 100k loan for renovations is also variable, so fluctuations will be felt immediately, as it is adjusted daily. Any recommendations on which to go with, or alternative strategies? I'd like to get my partner/investor a decent return, but I don't want to leave ourselves bleeding money 10 years down the road.