Why does the IRR diminish rather than increase with time?
The property value increases over time, therefore, all tax deductions of mortgage interest are of an increasingly smaller proportion of the increasing property value. This is why refinancing after a number of years is such a good idea – it brings the IRR back up to a healthy figure. Note in the default locations setup in REAP, the capital growth rate is higher than the inflation rate (which affects the growth in rent). All other things being equal, one would expect the long-term IRR to asymptotically (as the mathematicians say) approach the capital growth rate. The reason why an internal rate of return tends to be high initially is because most people buy a property for something less than the market value. This means the equity created instantly at the time of purchase results in a very high first year IRR; but that same equity is spread over 2 years for the 2-year IRR. Don’t forget the IRR figures in REAP are not for individual years, but rather they represent the IRR from purchase t
