Have you ever used MIRR (Modified Internal Rate of Return) in your commercial real estate (CRE) modeling? Recently, while reading Foundations of Real Estate Financial Modelling by Roger Staiger, I was reminded of an important distinction between IRR and MIRR — and how critical it is for making smarter investment decisions.

In this article, we’ll break down the difference between IRR and MIRR, and explore why MIRR can provide a clearer, more realistic view of a project’s potential profitability — especially for today’s commercial real estate operators.

What is IRR? (And When Should You Use It?)

Internal Rate of Return (IRR) is one of the most widely used metrics in commercial real estate investment analysis — and for good reason. IRR represents the discount rate at which the net present value (NPV) of all project cash flows, both incoming and outgoing, equals zero. In simple terms, IRR tells you the annualized rate of return a project is expected to deliver over its holding period, assuming that interim cash flows are reinvested at the same IRR. It condenses a deal’s entire financial performance into a single percentage, making it an invaluable tool for comparing opportunities across different assets, markets, and strategies. However, while IRR offers a convenient snapshot, it’s important to understand its underlying assumptions (and its limitations) before relying on it to drive investment decisions.

When IRR Works Well

Quick Comparisons: IRR is ideal for comparing multiple investment opportunities, especially those with similar risk profiles.
Investor Benchmarks: It helps determine if a deal meets the minimum return threshold investors require.

But beware: IRR assumes cash flows are reinvested at the IRR itself — an assumption that’s often unrealistic in real-world scenarios.
For deals with variable cash flows or longer hold periods, IRR can paint an overly optimistic picture.

What is MIRR?

Modified Internal Rate of Return (MIRR) builds on the foundation of IRR by addressing one of its most critical shortcomings: the unrealistic assumption that interim cash flows are reinvested at the project's own internal rate of return. In reality, very few operators or investors are able to consistently redeploy cash at such high rates. MIRR corrects for this by introducing more grounded assumptions about reinvestment. Specifically, MIRR assumes that interim cash flows are reinvested at the operator’s cost of capital — a rate that better reflects the true financing environment. This cost of capital typically combines two components:

Debt costs (loan interest rates)
Equity return expectations (based on market conditions and project risk)

Why MIRR Matters for CRE Operators

More Conservative Projections: MIRR tends to offer a more realistic, conservative measure of project returns.
Better for Complex Projects: It’s especially valuable for deals with irregular cash flow timing or high leverage.
Aligns With Financing Reality: MIRR factors in how capital is actually deployed and reinvested, rather than relying on a theoretical assumption.

How to Correctly Use MIRR in Excel

Using MIRR in Excel is straightforward, but it’s important to input the right assumptions:

Cash Flows: List your cash flows in a series (including initial investment as a negative value).
Finance Rate: This is the interest rate you pay for financing (your cost of debt).
Reinvestment Rate: This is the rate you expect to earn on reinvested cash flows (usually your cost of capital or target return).

Excel MIRR Formula:

=MIRR(values, finance_rate, reinvest_rate)

So for a quick example, if your project cash flows are in cells A3:G3, your loan rate is 6%, and your reinvestment rate (cost of capital) is 8%, you would enter:

Final Thoughts

While IRR remains a go-to metric in commercial real estate, it's important to recognize its limitations. For operators and investors looking for a more grounded view of a project’s true return potential — especially in deals with complex structures or heavy leverage — MIRR offers a clearer lens. By reflecting more realistic reinvestment assumptions, MIRR helps you make smarter, more finance-aligned decisions. At The Fractional Analyst, we integrate tools like MIRR into our modeling approach to help clients move beyond surface-level metrics and toward data-backed confidence in every deal.

MIRR vs IRR in Commercial Real Estate Modeling