Can I use a Balloon Loan for rehabs?

[Kevin Brenner]

I've been working through some creative financing ideas and I'd like to float this by some more experienced REIs: 

I'm looking to buy a house for $70K. I have estimated that to get it rent ready it will need about $40K worth of rehab. The market dictates that a rehabbed house of this size can get $1100/mo (hits the 1% rule after rehab). My strategy is to buy and hold for 5-7 years before evaluating if I should sell, refinance, or HELOC.

I have family/friends lender that is willing to pay the $40K rehab costs. Is it wise to set up a 5 or 7-year fixed rate balloon term with this lender. My thought process being that using a balloon payment that is amortized over 30 years will greatly increase my cash flow without crippling my capital and ability to invest in another property. As long as the house appraises decently well after rehab I should be able to sell/cash out refi/HELOC to pay the balloon right? Or is there something I'm not thinking of here?

Any help from the BP crew is much appreciated!