Still trying to understand my 5/20 year balloon loan

[Daniel Ditto]

To give a little background I recently took a 5/20 year balloon loan (if I understand correctly) where the loan amortizes at the rate of a 20 year loan but after 5 years the balance of the loan is due. Basically what I did was use 65% of the equity in 4 of our 6 single home rentals that we owned outright to purchase an additional 4 rentals outright, bringing us to 10 total- 4 mortgaged and 6 owned 100%. This was done back in June, before I was really exploring BiggerPockets so I didn't have this forum to ask. Since then all of the new rentals but one, which is still being completed, have renters who will occupy next month. 

In that sense everything is going according to plan and I honestly do not have a problem with the loan thus far. It was set at 6.125% through a small bank in St Louis MO, the payments are very manageable and they seemed good to work with. I approached another bank before the one I selected about such a loan but they were not interested in the small account with me and in the demographic of the properties I am purchasing. 

To give more context, these properties are inner city low income section 8 rentals which cost me around $40000 when purchased and are worth about $50000 after they are fixed up. I understand the hesitation from the first bank on this sector of homes as the expenses and turn over are generally very high. I would never manage such properties myself because of all the hassle but I have a great friend who manages in that sector and he is a rock-star and is making my landlord life fairly easy.  I have been at this for about 6 years and my properties have averaged about 15-18% return after all expenses per year with some years being much better and some being much worse. Up until June of this year I have been purchasing about 1 of these properties each year and I roll the income from each towards buying another property as soon as I can afford to do so while taking no disbursements as of yet. I do not rely on this rental income, other than as a mental safety net for if things ever got tough for any reason. My salary from full time work  provides for my family's needs.

Early this year I decided we have done well enough and the market is competitive enough that I wanted to gobble up a few more of these properties to accelerate my purchasing a bit. Since I have been purchasing with cash up until this point my knowledge about loans and loan options on income producing rentals is limited and that is where this line of questioning comes from. What my banker suggested is that a 5/20 year balloon is industry standard. The research I did on this was limited to a few friends who mostly purchase with cash like myself and through google but it all seemed to confirm what the banker said. My concerns are two fold:

1. Barring total disaster I can pay off the amount over 5 years but it puts a wrinkle in my plans. Ideally I don't really want to do this since it will severely limit my ability to continue to purchase additional properties which is really my reason for going this route in the first place. If I have to suspend additional purchases until payoff then I have complicated my process with little benefit to myself. That might put me only slightly, if at all ahead of where I was by purchasing properties at a 1 per year pace. To this concern my lender said I could just seek another 5/20 year balloon either from my current lender or another at the end of this loan period but I still wonder if that is a likely scenario or hopeful thinking not supported by reality. Last thing I want to do is rely on that scenario by going ahead and putting most of the rental income towards new purchases and then find at the end of 5 years that I cannot get a new 5/20 year loan and need to pay the balance back in full while its all sitting in the unsold equity of my rentals.

2.Did I have other institutional options? I simply do not know enough to say that a 5/20 year balloon was my only reasonable option on the table. If there are different options where I could do a 10 or 20 year loan or a 7/20 year balloon or who knows what else is out there than that seems like a better option if my fears in concern #1 are accurate. Can I simply take loans on a new property with some % down rather than using equity from current rentals to pay for others? Obviously if I could buy rentals with a 30 year loan like is often done for home purchasers then everyone would do it because it would be a no brainer IMO but my limited research does not seem to say that is the case. Maybe I could get a better loan if I was richer or if my properties were ritzier and worth double. Not sure. If the risk with a 5/20 year is not high I would love to rinse and repeat in even a year or so and use the equity in my other 6 rentals to help me buy another four or five properties. It only makes sense to grow with OPM if the option is there, understandable and not overly risky. Getting to around 20 of these properties would be a complete game changer in moving this purchasing process along. I have been playing very patient thus far and will continue to do so if the loan options don't make sense.

Anyway, your knowledgeable thoughts would be appreciated. Sorry to wax long but I feel the purpose behind my getting the loan and information on the type of properties is relevant to understand my goals and interest in what type of loans might be out there. If you know of other good non private options as far as loans go, understand the implications of a 5/20 year loan or if you see other risks I do not I would love to hear about them.