IRR has a hidden assumption that most investors don't realize: it assumes that every dollar of interim cash flow can be reinvested at the same rate as the deal's IRR.

On a 22% IRR development deal, IRR assumes you can redeploy every interim distribution at 22% annual returns. That's almost never true in the real world. By the time you get a $200K distribution from one deal, you might not have another 22% deal ready to go — so you park the cash in a money market earning 4% until you find the next one. That 4% gap between "theoretical IRR" and "what you actually earn" compounds over time.

MIRR (Modified Internal Rate of Return) fixes this. It lets you specify a separate, realistic reinvestment rate for interim cash flows. The result is a more honest annualized return number.

The two rates in MIRR

MIRR uses two rates instead of one:

Finance rate — the cost of any money you pay out during the deal (usually your borrowing cost, or your required return on new capital)
Reinvestment rate — the rate at which you can redeploy interim cash flows you receive during the deal (usually lower than IRR)

For most CRE investors, the reinvestment rate is something like 6-9% — reflecting what you can realistically earn on idle capital between deals.

The formula

MIRR is calculated by:

Discounting all cash outflows (negative cash flows) to today using the finance rate
Compounding all cash inflows (positive cash flows) to the end of the holding period using the reinvestment rate
Finding the annualized return that links the present value of outflows to the future value of inflows

You don't do this by hand — Excel's =MIRR() function handles it:

=MIRR(cash_flow_range, finance_rate, reinvest_rate)

A worked example

Take a deal with these cash flows:

| Year | Cash flow | |---|---| | 0 | -$500,000 | | 1 | $50,000 | | 2 | $60,000 | | 3 | $70,000 | | 4 | $80,000 | | 5 | $90,000 + $800,000 sale = $890,000 |

IRR calculation (using =IRR()): approximately 21.4%

MIRR calculation using 8% finance rate and 7% reinvestment rate (=MIRR(range, 0.08, 0.07)): approximately 16.8%

The IRR says "you're earning 21.4% per year." The MIRR says "factoring in realistic reinvestment, you're actually earning about 16.8% per year." The honest number is about 4.6 percentage points lower than IRR.

Over a 5-year hold, that gap is substantial. A $500,000 investment at a true 21.4% annual return grows to $1.32M. At 16.8%, it grows to $1.09M. That's a $230,000 difference in ending wealth on the same cash flow stream — just because IRR was too optimistic about reinvestment.

Why the gap exists

The gap between IRR and MIRR is larger when:

Interim cash flows are big relative to the exit — deals that pay out a lot during the hold have more cash that needs reinvesting
The deal's IRR is high — a 25% IRR has a bigger gap from a realistic 7% reinvestment rate than an 11% IRR does
The hold period is long — more years of compounding mismatch

The gap is smaller when:

Most of the return comes from the exit (like a development deal with minimal interim income)
The IRR is modest (8-12% deals — closer to what you'd realistically reinvest at)
Short hold periods — less time for the reinvestment assumption to matter

When MIRR matters most

MIRR matters more when comparing deals with different cash flow profiles. Consider:

Deal X: Heavy interim distributions

Year 1-4: $70,000/year
Year 5: $50,000 + $700,000 exit
IRR: 18%
MIRR (at 7%): 13.2%
Gap: 4.8 points

Deal Y: Back-loaded exit

Year 1-4: $15,000/year (minimal cash flow)
Year 5: $0 + $1,400,000 exit
IRR: 18%
MIRR (at 7%): 17.2%
Gap: 0.8 points

Both deals report an 18% IRR. But when you factor in realistic reinvestment, Deal Y actually delivers closer to its IRR while Deal X significantly underperforms. On an MIRR basis, Deal Y is substantially better — even though the two deals look identical on IRR.

This is exactly the kind of analysis institutional investors do, and why sophisticated buyers rarely rely on IRR alone.

Why private investors should use MIRR too

You might think "I'm not a pension fund — do I really need MIRR?" Yes, for two reasons:

Reason 1: It stops you from overpaying

A "17% IRR deal" might actually be a 12% MIRR deal. If you commit based on IRR, you're overpaying for returns that won't materialize. MIRR gives you a more honest baseline.

Reason 2: It helps you compare heterogeneous deals

When you're evaluating a stabilized NNN against a value-add multifamily against a development, the cash flow profiles are completely different. IRR can make them look more similar (or more different) than they really are. MIRR evens the playing field.

Picking the right reinvestment rate

What number should you use for the reinvestment rate?

Reasonable choices:

Your risk-free alternative rate (treasury yields ≈ 4-4.5% in 2026) — most conservative
A blended rate of what you'd realistically earn on idle capital (5-7%) — most common
Your weighted average cost of capital (WACC) — used by institutional investors
Your next-best deal's IRR — if you have a deep pipeline of opportunities at similar returns

For private investors, 6-8% is a reasonable default. That reflects the reality that you'll sometimes find good deals quickly, sometimes park capital at bond rates, and on average earn maybe 7% on idle cash.

The MIRR discipline

Here's a good habit: for every deal you underwrite, calculate both IRR and MIRR.

If IRR is 15% and MIRR is 13%, the deal is probably about what it seems. If IRR is 25% and MIRR is 14%, you need to ask whether your interim cash flows are really as valuable as they look — or whether most of the "return" is just the reinvestment assumption doing work that won't materialize in real life.

Sophisticated buyers use MIRR specifically to catch deals that look great on IRR but are hiding a large reinvestment gap.

When IRR is still the right metric

MIRR isn't always better. Use IRR (not MIRR) when:

You actually can redeploy cash at the same rate, such as a sponsor running multiple similar deals on a rolling basis
You're comparing deals with identical cash flow profiles, where the reinvestment assumption affects both the same way
The hold period is very short (1-2 years), where reinvestment mismatch doesn't have time to compound
Almost all the return is at the exit, so there's little interim cash to reinvest

For any back-of-envelope deal screen where you're just trying to see if a deal is worth deeper analysis, IRR is fine. For final decisions on comparable deals, check MIRR.

What to take away

IRR assumes you reinvest interim cash flows at the same rate as IRR — usually not realistic
MIRR uses a separate, realistic reinvestment rate, giving a more honest annualized return
Use Excel's =MIRR(range, finance_rate, reinvest_rate) to calculate it
A typical reinvestment rate for private CRE investors is 6-8%
The gap between IRR and MIRR is larger for deals with heavy interim cash flows and high IRRs
Sophisticated buyers always calculate both and use the gap as a sanity check

Next lesson: equity multiple and the difference between levered and unlevered returns — the metrics that keep IRR honest on the other side.

MIRR — The Honest Version of IRR