A balloon payment is a large lump sum that comes due at the end of a loan term because the monthly payments were never sized to pay the loan off in full. The payments cover interest and only a sliver of principal, so a big balance is still owed on the final due date, and that balance is the balloon.
In practice
Say a seller carries a $200,000 note on a rental at 8%, with payments amortized over 30 years but the whole balance due in 5. The monthly payment is set as if you had 360 months to pay, about $1,468. After 60 of those payments you have paid roughly $88,100 total, but only about $11,400 of it touched principal. The balance still sitting on the loan at month 60 is about $188,600. That number is the balloon, and you owe it on one date, in one check.
Where does $188,600 come from in 5 years? You either refinance into a new loan, sell the property, or have the cash saved. If rates have risen or the property will not appraise, refinancing can fall through, and a balloon you cannot cover is how an otherwise paying landlord loses a building.
Why it matters to a small landlord
A balloon is a deadline disguised as a monthly payment. The low payment flatters your cash-on-cash return in the early years, because little of your payment is going to principal, but it sets a hard cliff you have to plan years ahead for. The interest portion is still deductible and the principal portion still is not, so the deductible split is worth getting right from day one: see tracking mortgage interest, principal, and escrow. Treat the balloon date the way you treat an insurance renewal, as a fixed obligation on the calendar, not a someday problem.
Balloons show up most often in seller financing, where a short balloon lets the seller cash out in a few years, and in a hard money loan, where the entire balance is due in months. In both cases the gap between your low monthly payment and the real payoff is the work that amortization would normally do over decades, compressed into a single date you have to be ready for.