I have put these numbers into IRR calculator and it doesn't match an IRR of Excel calculator I got from a real estate professional.

Perhaps someone can help me understand few things:

1) How come IRR goes down each year?

2) Why is "Return (IRR): 20.27% per year", shouldn't it be all the years combined and divided by years?

3) How come it doesn't take into account principal payment? For example, first year the gain comes from $147,087 cash flow + ~5% increase of property value $248,881 = $395,968, so $1,500,000 -> $1,895,968 matches return exactly at 26.40%, but part of the mortgage is principal which it doesn't seem to take into account?

If anyone can find time to answer me I will be really thankful!

IRR is an extremely difficult number to use as a RE investor. In general, they can only be applied to the simplest of calculations.
For the Excel spreadsheet:
The property value does not change over time.
The principal paydown is not included in the calculation.
Interest rate cannot vary.-> amount of principal paydown varies.

The excel spreadsheet does not take these into account. ie. not useful for Real Estate.
It only calculates
Returns the internal rate of return for a series of cash flows represented by the numbers in values. These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. The internal rate of return is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.

I have found most RE IRR tools are also not useful as , In addition, they
cannot be used if :

you refinance the debt at a higher or lower unknown % (very common in limited partnerships or syndications after year 1 and year 4-5)
There are regular, or irregular payouts on an investment. (this is also very common in limited partnerships and syndications)
We usually have AGMs in partnerships for this stuff and determine the amount of payout that year.
The payouts are affected by unforeseen events such as : Above or below the estimated rental occupancy, insurance events, unforeseen property expenses (snow removal costs can be $0 or $20,000 depending on the weather, Massive insurance premium increases due to natural disaster in a nearby but not your exact location, etc..)

Technically you can do this calculation, but you have to give a value for each variable , in the time that you are going to calculate over and then do a NPV calculation for each period (year) and sum them. This long form calculation that gives a more accurate IRR calculation makes the use of a simple IRR spreadsheet kind of useless.

If anything, just use those spreadsheets for an estimate only. Use it as one data point and compare it to OTHER investments, using the same criteria;
not as an actual value.
If you give more details, I can help you work out the way I think about RE investments.
Monthly rent of $40K looks nice.
5.5% commercial mortgage looks too low for current mortgage rates.
a 20y mortgage looks very very low for a RE investor.
0% management fee? are you me? going to live in the place? hahah, if yes.. NICE!

Mindflayer: I would humbly disagree. IRR is a very easy number to use, but can be difficult to arrive at. Any template that is handed out probably has taken so liberties with simplifying the calcs. In a former life, I built these sheets, and I can tell you that the process of building them if often more informative than the number you arrive at. That being said, if you can get it down to cash flows on specific dates, then just use XIRR to calc. (Also, this is easier said than done, so good luck). MF also makes a good point without saying it explicitly: you need someone with expertise to review your numbers and question your assumptions. You should know not only all the numbers going in, but also why they are what they are (especially the plugs).

Not sure what you disagree with.
1) they are difficult to arrive at unless you can get it down to cash flows on specific dates.
IRR does not take into account principal paydown.

cash flows are only estimates so the IRR is also an estimate.

I am a person that people ask about assumptions in calculations. I have done many actual budgets ranging from 200k to +1m for 20-100 units for many years with many properties.
It is only after years of looking at them that I can see when a new investor is doing calculations for NOI that they have left off x item or y item or z item... and so have
under estimated their maintenance cost .. and have actual negative cash flow when they think it is positive.
This usually happens when a buyer takes the sellers Pro Forma sheet and uses them as is. They are rarely close to true. They are what the buyer wants you to think, so they can ask
for the maximum amount .

I was helping someone out that wanted to be a developer and sent him daily emails until we hit 101 questions that needed to be answered before he proceeded.
At the time he contacted me started he thought he was ready to move forward. He only knew the answer to maybe 5 of the questions I asked.

Did you know that an elevator operator in BC Canada charges $400/h and that they are required to be onsite for a required annual fire inspection?
Now look at the IRR spreadsheet that OP used. It shows a monthly maintenance cost of $1000 and annual maintenance cost of $12,000.
That is a red flag right there.
In my high level view of apartment buildings, I use 40-55% of rental income as the maintenance %, depending on the age of the building.
I have signed garbage-recycling contracts alone for properties with $40,000/month rental income that are more than $1000/m.

Only that they are hard to use. Well calculated (i.e. accurate) IRRs are easy to compare to other investments. 100% agree that they are hard to arrive at, and it sounds like agree the process is as important, if not more, than the final IRR arrived at.