MIRR: Modified Internal Rate of Return in Commercial Real Estate
IRR, or internal rate of return, is one of the most important financial metrics in commercial real estate investing. However, in many cases, a variation of IRR, called MIRR, or modified internal rate of return, can actually tell us more about the profitability of a commercial real estate investment, especially if we are considering that an investor may be reinvesting the cash from one CRE investment into other properties (or other types of investments).
Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get QuotesWhat is Modified Internal Rate of Return?
IRR, or internal rate of return, is one of the most important financial metrics in commercial real estate investing. However, in many cases, a variation of IRR, called MIRR, or modified internal rate of return, can actually tell us more about the profitability of a commercial real estate investment, especially if we are considering that an investor may be reinvesting the cash from one CRE investment into other properties (or other types of investments).
IRR vs. MIRR: What’s the Difference?
IRR can be defined as the rate earned on each dollar invested for each period in which it is invested. MIRR takes this to another level by adjusting for the reinvestment of any positive interim cash flows by using a reinvestment rate. This is the rate at which an investor would be able to get if they reinvested the excess cash from their investment. In contrast, any negative cash flows are discounted back to the present by using a finance rate.
For instance (as represented by the table above), if a property was purchased for $110,000 and generated $10,000 a year of income over the next 3 years, after being sold for $120,000 at the end of the fourth year, and the reinvestment rate has been set at 10%, the IRR would be 12.94%, while the MIRR would be 12.69% (adjusting for the fact that the reinvestment rate is somewhat lower than the IRR). This corrects one of the main flaws of IRR, as it is often unrealistic to assume that an investor will be able to generate the exact same rate of return from any excess cash they reinvest.
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Related Questions
What is the definition of Modified Internal Rate of Return (MIRR) in commercial real estate?
Modified Internal Rate of Return (MIRR) is a variant of Internal Rate of Return (IRR) that takes into account the fact that a commercial real estate investor is likely reinvesting any positive cash flow they receive into a different investment. It uses the investor’s estimated rate of return on this reinvested cash, known as the “reinvestment rate” to calculate an new IRR, or “modified” IRR that will more accurately represent an investor’s overall return.
Source 1 Source 2How is Modified Internal Rate of Return (MIRR) calculated in commercial real estate?
Modified Internal Rate of Return (MIRR) is calculated by taking into account the fact that a commercial real estate investor is likely reinvesting any positive cash flow they receive into a different investment. It uses the investor’s estimated rate of return on this reinvested cash, known as the “reinvestment rate” to calculate an new IRR, or “modified” IRR that will more accurately represent an investor’s overall return.
For more information, please see MIRR: Modified Internal Rate of Return in Commercial Real Estate and Internal Rate Of Return (IRR) Calculator & Usage.
What are the advantages of using Modified Internal Rate of Return (MIRR) in commercial real estate?
The main advantage of using Modified Internal Rate of Return (MIRR) in commercial real estate is that it takes into account the fact that a commercial real estate investor is likely reinvesting any positive cash flow they receive into a different investment. This allows for a more accurate representation of an investor’s overall return. Additionally, MIRR uses the investor’s estimated rate of return on this reinvested cash, known as the “reinvestment rate” to calculate an new IRR. This allows for a more accurate calculation of the return on investment.
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What are the disadvantages of using Modified Internal Rate of Return (MIRR) in commercial real estate?
The main disadvantage of using MIRR in commercial real estate is that it is more complex than IRR and requires more assumptions. For example, it requires the investor to set a reinvestment rate and a finance rate, which can be difficult to accurately estimate. Additionally, MIRR does not take into account the time value of money, which can lead to inaccurate results. Finally, MIRR does not take into account the risk associated with the investment, which can lead to an overestimation of the return.
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What are the best practices for using Modified Internal Rate of Return (MIRR) in commercial real estate?
The best practices for using Modified Internal Rate of Return (MIRR) in commercial real estate are to use it when considering that an investor may be reinvesting the cash from one CRE investment into other properties (or other types of investments). MIRR takes into account the fact that a commercial real estate investor is likely reinvesting any positive cash flow they receive into a different investment, and uses the investor’s estimated rate of return on this reinvested cash, known as the “reinvestment rate” to calculate an new IRR, or “modified” IRR that will more accurately represent an investor’s overall return.
It is important to note that MIRR is not always the best metric to use when evaluating a commercial real estate investment. In some cases, the traditional IRR may be more accurate. It is important to consider the context of the investment and the investor’s goals when deciding which metric to use.
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How does Modified Internal Rate of Return (MIRR) compare to other methods of evaluating commercial real estate investments?
Modified Internal Rate of Return (MIRR) is a variant of Internal Rate of Return (IRR) that takes into account the fact that a commercial real estate investor is likely reinvesting any positive cash flow they receive into a different investment. It uses the investor’s estimated rate of return on this reinvested cash, known as the “reinvestment rate” to calculate an new IRR, or “modified” IRR that will more accurately represent an investor’s overall return. This makes MIRR a more accurate measure of profitability than other methods of evaluating commercial real estate investments, such as Net Present Value (NPV) or Cash on Cash Return (CoC).
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