Investors often purchase real estate with the expectation that it will increase in value while providing ongoing returns. When deciding which real estate to buy, investors must compare projected returns on these assets to decide whether or not to invest. A thought leadership piece by Colliers’ Marilynne Clark suggested calculating the internal rate of return (IRR) for each asset as one way of evaluating alternative investments. However, this method does not take into account potential reinvestment of cash flow proceeds or cost associated with generating funds for any cash flow shortfalls over a hold period. Two other approaches that may provide better insight into projected returns are capital accumulation and modified internal rate of return (MIRR).
Capital accumulation tracks an asset’s value increase during ownership and is presented in dollar format; it is calculated by subtracting the amount invested from its current value at a specific point in time. MIRR presumes both reinvestment of positive cash flows and financing capital outlays; its calculation formula is: (positive cash flows x cost of capital)/(initial outlays x financing costs). Incorporating these two methods can help investors make more informed decisions when comparing alternative investments than IRR alone would allow them to do so, giving them greater insight when facing such decisions about which investment they should purchase.
