Investment Metrics Decoded: IRR vs. MIRR

Internal Rate of Return (IRR)
vs. 
Modified Internal Rate of Return (MIRR)

Written by: Bryce Berta, M.A.

Sales and Marketing Specialist for TheAnalyst PRO

When assessing investment opportunities, two critical metrics take center stage, IRR (Internal Rate of Return) and MIRR (Modified Internal Rate of Return). These metrics, though related, offer unique insights into a project's potential profitability. Let's delve into their key distinctions.

IRR, a long-standing industry standard, signifies the discount rate at which an investment's net present value (NPV) reaches zero. Essentially, it reveals the rate at which an investment appreciates or depreciates over time. A higher IRR generally indicates a more promising investment prospect. However, IRR has its limitations, particularly in dealing with complex cash flow patterns that can lead to multiple or no solutions, making it challenging to interpret.

Enter MIRR, a refined version of IRR engineered to address its drawbacks. MIRR assumes that positive cash flows are reinvested at the reinvestment rate, mirroring real-world scenarios more faithfully. This eliminates the possibility of multiple IRRs and guarantees a single, dependable rate of return. Unlike IRR, MIRR also acknowledges that negative cash flows are calculated at the finance rate, a more pragmatic consideration.

While IRR and MIRR provide a relative measure of investment performance, it's crucial to consider an additional metric to gauge the actual increase in cash. Accumulated Capital, also known as Equity Accumulation, measures the total equity an investor accumulates in a real estate investment over time. IRR and MIRR indicate relative increases in percentage terms, whereas accumulated capital quantifies the actual growth in investor equity.

In summary, both IRR and MIRR are indispensable tools for evaluating investments. While IRR has been the historical benchmark, MIRR offers a more realistic and dependable assessment by factoring in practical reinvestment and financing rates. Incorporating both metrics into your investment analysis toolkit empowers you to make well-informed decisions, minimizing risks and maximizing returns.

TheAnalyst PRO offers an array of incredibly easy to use investment analysis tools, including MIRR and Accumulated Capital reports that can be run in mere minutes. If you are a broker or investor needing to analyze a commercial real estate investment property, TheAnalyst PRO is the tool for the job.