MIRR

Introduction to MIRR in Real Estate

What MIRR Stands For (Modified Internal Rate of Return)

The Modified Internal Rate of Return (MIRR) is a financial metric that refines the traditional IRR by allowing separate finance and reinvestment rates. In real estate, MIRR offers a single, unique rate of return that accounts for realistic borrowing costs and achievable reinvestment earnings.

Why MIRR Matters for Property Investors

Property investments often generate uneven cash flows and require capital at varying times. MIRR helps investors:

• Compare projects on a level playing field.
• Avoid overstating returns due to high IRR reinvestment assumptions.
• Incorporate actual financing rates (cost of capital) and conservative reinvestment rates.

Why MIRR Is Preferred Over IRR in Property Analysis

Reinvestment-Rate Assumptions: MIRR vs. IRR

IRR assumes interim cash flows are reinvested at the same IRR, which can be unrealistically high. MIRR lets you specify a lower, more conservative reinvestment rate—such as your bank’s savings rate—to reflect real market conditions.

Handling Multiple Sign-Change Cash Flows

Projects with alternating investments and returns can produce multiple IRRs or no solution. MIRR consolidates all negative cash flows at the finance rate and compounds positive flows at the reinvestment rate, yielding one clear rate.

Comparing MIRR with ROI, NPV and Payback Period

• ROI measures total percentage gain without time value of money.
• NPV calculates dollar value added but not a percentage rate.
• Payback Period shows time to recoup investment, ignoring cash flows beyond payback.
• MIRR combines the strengths of IRR with realistic reinvestment and financing assumptions.

The MIRR Formula and Key Inputs

MIRR Formula Breakdown

MIRR = (FV_positive / PV_negative)^1/n – 1, where:

• FV_positive = future value of positive cash flows compounded at the reinvestment rate.
• PV_negative = present value of negative cash flows discounted at the finance rate.
• n = total number of periods.

Choosing the Finance (Borrowing) Rate

Select your weighted average cost of capital (WACC) or loan interest rate to discount any outflows or project funding.

Choosing the Reinvestment Rate

Use a conservative estimate like your bank’s deposit rate or corporate reinvestment rate to compound interim inflows.

Step-by-Step Hand Calculation Example

Example: $100 K purchase, 5 years of $18 K net CF, $100 K sale at year 5. Finance rate = 8%, reinvestment rate = 10%.

1. Compute FV of annual $18 K at 10% to year 5.
2. Compute PV of $100 K initial at 8% to year 5.
3. Apply MIRR formula: (FV/PV)^1/5–1 ≈ 15.98%.

Calculating MIRR in Excel

Excel’s MIRR Function Syntax

=MIRR(values, finance_rate, reinvest_rate)

Required Cash-Flow Range and Rate Inputs

Values: range including initial negative outflow and subsequent net CFs. Finance_rate: your borrowing cost. Reinvest_rate: chosen reinvestment rate.

Common Pitfalls and Error-Checking Tips

• Ensure the first cash flow is negative.
• Match period intervals (annual, monthly).
• Watch for empty cells or text in the range.

Interpreting Your MIRR Results

What Constitutes a “Good” MIRR in Real Estate Deals

A “good” MIRR exceeds your hurdle rate or cost of capital. Typically, 12–20% is attractive in most markets.

Benchmarks by Asset Type (Residential, Development, Flip)

• Residential rentals: 10–15% MIRR.
• Ground-up development: 15–25% MIRR.
• Flips and short-term deals: 20–30% MIRR.

When Two Projects Have Similar MIRRs: What to Consider

Compare risk profiles, leverage levels, holding periods and liquidity needs to make the final decision.

Real World Application

Scenario 1: Rental-Property Acquisition and Cash-Flow Reinvestment

Invest $150 K, generate $20 K/year, sell after 7 years. MIRR uses your mortgage rate (finance) and your savings yield (reinvestment), giving a realistic blended return.

Scenario 2: Ground-Up Development with Staged Funding

Fund 3 construction draws, receive progressive sales releases. MIRR reflects draw costs at finance rate and reinvests partial presales at conservative rates.

How MIRR Picks Up Realistic Returns Where IRR Can Mislead

By capping reinvestment at achievable rates, MIRR often shows lower but more dependable returns versus IRR’s optimistic assumptions.

Advantages and Limitations of MIRR

Pros: Realistic Reinvestment & Single Unique Rate

• Considers cost of capital and achievable reinvestment.
• Eliminates multiple‐IRR ambiguity.

Cons: Sensitivity to Rate Assumptions & Requires Two Rates

• Overly conservative or aggressive rates skew results.
• Needs careful selection of both finance and reinvestment rates.

Frequently Asked Questions (FAQs)

What Exactly Does MIRR Stand For?

It stands for Modified Internal Rate of Return.

How Does MIRR Handle Negative or Irregular Cash Flows?

All negative flows are discounted at the finance rate; positives are compounded at the reinvestment rate, ensuring one unique return.

When Should I Use MIRR Instead of IRR or NPV?

Use MIRR when reinvestment assumptions matter and multiple sign changes exist. Use NPV to determine dollar value added.

Can You Directly Compare Two Properties by MIRR?

Yes—provided they share the same finance and reinvestment rate assumptions, letting you rank deals by percentage return.

What Are Common Mistakes When Setting Finance vs. Reinvestment Rates?

Choosing unrealistically low reinvestment rates or ignoring variable borrowing costs can distort MIRR.

Conclusion and Next Steps

Recap of MIRR’s Benefits for Real Estate Investors

MIRR delivers a realistic, single-rate return by blending financing costs and achievable reinvestment yields, making comparisons fairer and projections more dependable.

Further Reading and Tools (Templates, Calculators)

Explore online MIRR calculators or download free Excel templates to streamline your analysis.

How to Incorporate MIRR into Your Next Investment Proposal

Include both IRR and MIRR in your financial summaries, explain your rate assumptions, and show how MIRR validates your projected returns.