Evaluating the value of real estate can be difficult. As such, people who make investments in things like apartment buildings or commercial real estate have a full set of complex metrics to look at the long-term value of a potential holding.
The Financial Management Rate of Return is one of these. It fits in with a set of similar figures, along with Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR).
Think of them as the Rate of Return triplets.
The math behind each is fairly complex. But the basic purpose of the Rate of Return triplets is to compare the amount necessary to invest in real estate with future cash flows from the investment.
The three measures get more complex as you go from one to another. They start with IRR, which is relatively simple. The intricacy deepens with MIRR, which adds some complexity about rates related to reinvestment and borrowing costs.
Finally, FMRR represents the most complicated Rate of Return triplet. Its math includes some further assumptions about funds needed to cover potential negative cash flow and the reinvestment rate of positive cash flows.
Related or Semi-related Video
Finance: What Is a Real Return?67 Views
finance- a la shmoop. what is a real return? like is there a fake return? you
know like the news? well kinda .real return refers to an [man frowns talking to camera]
investment return mapped against inflation. so let's say you invest in a
bond that pays five percent a year for ten years and then pays you back your
principal .boring but nice- you know like a good doctor visit. your nominal return
over that period was 5% but since inflation was 3% a year during that
period on average your real return was only 2% a year- meaning that the
performance of your investment only eked out a 2% net gain against the price of [equation]
milk gas and you know knocked off iPhones. so don't be a chump who thinks
that they're making more money than they really are, and you know keep on keeping
it real. [man sitting in chair, talks to camera]
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