| How do you know if your real estate venture will | | | | expected yield, but accounts for the yield after |
| make money? You're dealing with a considerable | | | | reinvesting in the initial project. This is the goal with |
| amount of money, and you don't want to waste a | | | | commercial real estate ventures; to reinvest some of |
| single penny. A real estate investment is not | | | | that profit into the business so that it continues to |
| something you want to dive into blindly, which is why | | | | increase in profits. |
| the modified internal rate of return is so useful. | | | | The MIRR is a great way to predict how much your |
| The modified internal rate of return, or MIRR, is a | | | | possible project will make, but with real estate |
| calculation that gives you an idea of how much your | | | | ventures, it is not always so easy. The first step for |
| real estate venture will make you. In the end, the | | | | any real estate investor is to pay back the property |
| modified formula tells you whether the deal is worth | | | | loans that funded the project in the first place. Very |
| it or not. | | | | few people can start a career in real estate |
| Before you can understand the MIRR, you need to | | | | investment without first taking out a hefty loan, and |
| be familiar with the internal rate of return. | | | | you won't see the profits until afterward. |
| Internal Rate of Return | | | | Advantages of the MIRR |
| The internal rate of return, or IRR, is basically the | | | | This calculation is a better predictor of how much |
| expected profit on a real estate venture. There is a | | | | profit a project will make, because it assumes that |
| difference between the two figures. Knowing which | | | | the money will be reinvested at the same initial cost. |
| is which can help you master these somewhat | | | | If you work out the same problem using both |
| complex formulas. The results of this type of | | | | methods, you will sometimes find that the profit |
| calculation have been used by big companies for | | | | balance comes out positive with the IRR and |
| years to predict if a project is worth financing. | | | | negative with the MIRR. This is dangerous, because |
| Basically, this calculation tells you the expected yield | | | | the IRR may be misleading profit-wise. |
| of a venture or project. This yield should add to the | | | | Basically, the modified calculation is the better of the |
| company's (or investor's) wealth, and is measured | | | | two because it allows you some flexibility. You can |
| against other possible projects. It is also sometimes | | | | enter whatever amount you deem appropriate. The |
| measured against existing projects. For example, | | | | IRR has a tendency to overstate the amount of |
| when a corporation is considering several different | | | | money you will make, so the modified internal rate of |
| investments, it may use this calculation to decide | | | | return is safer to use for long term projects. |
| which is most profitable. | | | | Once you know how to use this calculation, you will |
| The IRR Gets Modified | | | | be able to safely predict whether a particular real |
| What makes the "modified" rate of return different? | | | | estate investment is worth doing or not. |
| This second formula takes into account not only the | | | | |