How to prepare for a balloon payment

[Stanci March]

I posted this on the commercial investing forum but haven't had much luck with responses. Maybe someone who works in commercial financing can help me out?   

I'm looking at a 100% leveraged deal on a 6-plex in a college town. This property should cash flow even (or very close to it) as a fully leveraged deal including expenses and should be an excellent appreciation play.

I'm putting 10% down through a cash out refi on another SFH I own outright, with some remainder coming from a second loan on my primary residence. Seller is carrying back the rest at 5.75% (seems a bit high but no origination fees) on a 1 yr arm (he has one year left on his arm with the bank)...at which point the rate would fluctuate based on prime just like his commercial loan. This loan will be on a 25 yr amortization schedule with a 5 year balloon.

I'm a bit nervous about the balloon because if the property doesn't appreciate in five years I'll only have ~7% (aside from my leveraged 10% downpayment) in equity and will need to come up with a significant sum to get my LTV sufficient to refinance with a commercial lender.

Am I looking at this correctly or will a bank consider the 10% leveraged down payment I have included in the deal as equity, putting me at 83% LTV? 

[Chris Mason]

Hi @Stanci March,

Best suggestion I've got: at around the 2 year mark, attempt to refinance it with a normal commercial loan. Assume the answer will be "no." But pay attention to the reasons why they said no, not just the "insufficient equity" part, but the other reasons too. Great, now you've got a "to-do" list. Try again at the 3.5 year mark. If they say yes at that point, great! If they say "no" again, then you've got a second "to-do" list and should be ready to rock in time to close on the refinance at the 5 year mark, 18 months later.