Seller Financing Interest Rate - How does that work?

[AJ Johnson]

So I am in negotiations with a friend to buy 2 local rental properties, both 2 bed/2 bath- which would be my first investment property. Total value is $750K, and his mortgage is 1800 total for both. I would put 25K down (he doesn't need big money ASAP) for a total loan of $725k. Running numbers I can pay his mortgage plus $400 per month (so $2200 total) and still have $400 left for me. The homes are near Boulder, Co, so the possible rise in home value and/or rent rates is very appealing. 

The question is that he wants an interest rate based on the 725K "loan". I explained that he is not giving me any of his actual money, rather the loan is based on the value of the homes. I said that I am basically paying him $400 to allow me to pay his mortgage, deal with tenants, and take care of repairs, etc. 

Also, I offered a balloon payment after 5 years. By my math, that equals me paying 132,000 to him over 5 years, then owing him $618,000. He says that my monthly payments are really only the $400, not the full $2200 as he would be paying that anyways.

So who is right here or are we both a bit right/wrong. I understand that seller financing really comes down to whatever we agree to, but he has put it on me to present him with the structure and I want to be fair and honest from the start.