Modified Internal Rate of Return for Larger Profits

By: Andrew Stratton

When analyzing a real estate deal, the most important thing you need to consider is the modified internal rate of return. This is the figure that will determine how profitable an investment could be, and will ultimately decide whether you invest or not.

The modified internal rate of return is the same concept as the internal rate of return. The difference between the two indicates that the formula has been slightly modified to get a more realistic idea of how lucrative a deal you are considering.

This figure takes into account what you do with profits. It is particularly useful for any firm or investor who considers long term profitability, instead of simply the profits of one deal. This formula can help any investor to select more lucrative transactions. As a savvy investor, you should be aware of the concept.

Any real estate firm can have many different property investment opportunities at any given time. The firm will have to do commercial property analysis for each opportunity to determine which ones are worth their funds, and which ones constitute financial drains or losses.

Previously, all of this analysis was done by hand, and involved complex computation. Now, it is possible to do it all through the use of investment property software. A computer solves the complex algorithms for you. Your task is simply to enter the necessary data. This makes it much easier, if you are trying to find the most profitable combination for multiple transactions with numerous variations.

The internal rate of return normally considers only the initial investment. A modified calculation adds another variable to the equation by considering the rate of return on money that is re-invested. So, if there is an investment with a high yield, but the money will be invested with a regular return, the modified internal rate of return will reflect the true value of the venture (considering the fact that the re-investment will not be quite as profitable).

Since most firms need to constantly invest in different deals to remain profitable, it makes sense to determine the re-investment ahead of time. It helps to know where each dollar will be during the life of the investment, and it will give you an idea of future as well as current expenditures.

With the right commercial property analysis tools at your disposal, it is easy to compute the modified internal rate of return. It is a figure that most successful real estate professionals use in their day to day work, and it is also a figure that the average person has trouble understanding. Getting the best investment property software allows you to get around the difficult computations of determining profitability. When you figure out the modified internal rate of return, you need to input basic information about the deal such as: the finance and reinvest rates, the net present value, and several other key figures. With the right tools, you can quickly determine where your biggest profits will come from.

Real Estate
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Real Estate