I don't know the laws in Australia, but in the states, you can usually get a low down payment loan if you will live in the place and you can do this up to a 4 unit and rent out the rest.

You should be able to go as low as 10-15% down payment with your experience.Ground up Financing: Most "ground up" financing options require a bit of experience - 3-5 exists (rehabbed & sold or rehabbed & refinanced in the last 3 years).

Is it foolish to consider using the HELOC for the down payment?

Here’s the situation:Purchase Price: $540,000Down Payment: 20%Mortgage Rate: 7.125% (30-year fixed)Monthly Expenses (Mortgage, HOA, Taxes, Insurance): $3,706Realistic Max Rent: $3,000As you can see, I’m currently short $706/month even with max rent.

Medical Payments: Provides coverage for an injury suffered on the premises.

@Robert StephensonIf you have enough equity in your primary or rental you can get a HELOC or HELOAN and use the proceeds as a down payment to buy another rental.

You can allocate those proceeds any way you want - as equal down payments or buy one for cash and others with loans - It doesn't matter a bit as long as you use all of the cash and purchase at least as much as you sell. 

I offered them 10% down, interest rates favorable to me, amortized for 30 years, but with a balloon payment after 3-5 years.

You should find out what percentage of the rent is being paid by S8 and by the tenant.Tenants have to sign the rent increase and some won't because they don't want their payment portion increasing.It's also highly unlikely a S8 office will approve the huge increase from $797 to $1300.- BTW: the $1300 includes all utilities being paid by the landlord.

Doing this would allow me to cut my down payments in half.