Is this real and what does this mean?

[Abdul Azeez]

Folks - I am a beginner real estate investor in NJ and one of my subject properties is a foreclosure. I used Frank Gallinelli's book What Every Real Estate Investor Needs to know about Cash flow on one of my subject properties. I constructed an APOD (Annual Property Operating Data) and then derived cash flow before taxes as well as what would be my before tax sales proceeds if I sold the property at the end of 1 year, 2 year, 3 year etc. until 10 years. From here I plugged the numbers into an IRR calulator to see what my overall return would be based on the different holding periods above.

The subject property is a foreclosure which I believe could be obtained around $145k. At end of first year based on comparables, I believe it can be sold for $180k. One key item I engineered here for the calculation is that the initial $5k or so that I would need to put in to get the property to a rentable situation is not accounted for as either 1st year repair or 1st year cap cost. Instead, I used this as an addition to my initial investment so that my denominator on the cash on cash return becomes Downpayment + Closing cost + Cost to get property to rental condition. 

The following is my analysis. If you skip over until you reach the IRR, what this tells me is that my overall return will go down the longer I hold the property and the best recommended time frame to sell it is after 1 year. Discounting the fact that you have higher capital gains tax for property sold in a year, then the next best time to sell it is after 2 years. Is this telling me a true story that the longer I hold the property, the lesser my overall return is going to be? Is this typical of foreclosure properties? I am a bit confused by what this analysis is telling me. I would appreciat some help or guidance.

Year	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026
INCOME
Gross Scheduled Rent Income	21,600	22,248	22,915	23,602	24,310	25,039	25,790	26,564	27,361	28,182
Other Income	0	0	0	0	0	0	0	0	0	0
TOTAL GROSS INCOME	21,600	22,248	22,915	23,602	24,310	25,039	25,790	26,564	27,361	28,182
VACANCY & CREDIT ALLOWANCE	3,600	3,708	3,819	3,934	4,052	4,173	4,298	4,427	4,560	4,697
GROSS OPERATING INCOME	18,000	18,540	19,096	19,668	20,258	20,866	21,492	22,137	22,801	23,485
EXPENSES
Accounting	200	206	212	218	225	232	239	246	253	261
Insurance (fire and liability)	600	618	637	656	676	696	717	739	761	784
Legal	300	309	318	328	338	348	358	369	380	391
Repairs and Maintenance	1,296	1,335	1,375	1,416	1,459	1,502	1,547	1,594	1,642	1,691
Taxes
Real Estate	5,266	5,424	5,587	5,755	5,928	6,106	6,289	6,478	6,672	6,872
TOTAL EXPENSES	7,662	7,892	8,129	8,373	8,626	8,884	9,150	9,426	9,708	9,999
NET OPERATING INCOME	10,338	10,648	10,967	11,295	11,632	11,982	12,342	12,711	13,093	13,486
ANNUAL DEBT SERVICE	6,420	6,420	6,420	6,420	6,420	6,420	6,420	6,420	6,420	6,420
CAPITAL COSTS	0	1,335	1,375	1,416	1,459	1,502	1,547	1,594	1,642	1,691
CASH FLOW BEFORE TAXES	3,918	2,893	3,172	3,459	3,753	4,060	4,375	4,697	5,031	5,375
CASH ON CASH RETURN	8.59%	6.34%	6.96%	7.59%	8.23%	8.90%	9.59%	10.30%	11.03%	11.79%
CAPITALIZATION RATE	7.13%	7.34%	7.56%	7.79%	8.02%	8.26%	8.51%	8.77%	9.03%	9.30%
DEBT COVERAGE RATIO	1.61	1.66	1.71	1.76	1.81	1.87	1.92	1.98	2.04	2.10
Projected selling price	170,000	173,400	176,868	180,405	184,013	187,693	191,447	195,276	199,182	203,166
Cost of sale	11,900	12,138	12,381	12,628	12,881	13,139	13,401	13,669	13,943	14,222
1st mortgage payoff	106,603	104,677	102,677	100,570	98,382	96,099	93,718	91,233	88,641	85,936
Before tax sales proceeds	51,497	56,585	61,810	67,207	72,750	78,455	84,328	90,374	96,598	103,008
Internal Rate of Return	21.52%	18.58%	17.40%	16.68%	16.17%	15.77%	15.43%	15.15%	14.91%	14.25%
Purchase price	145000
Mortgage	108750
Downpayment	36250
Closing cost	4350
Getting ready to rent	5000
Actual cash invested	45600