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The Financial Management Rate of Return (FMRR) And How to Compute It For Real Estate Investing

Amongst the many real estate investing returns utilized by investors to measure profitability of investment real estate, the financial management rate of return (also known as FMMR) undoubtedly is one of the most unique yet lesser known returns. What I believe is the conception of the Commercial Investment Real Estate Institute (or CIREA) because I have never come across the return ever implemented elsewhere, financial management rate of return is presented by CIREA in the normal course of study to those that desire the designation Certified Commercial Investment Member (or CCIM). Okay, so what exactly is the financial management rate of return, what makes it unique, and what steps are involved to calculate it?Let’s begin with why FMMR is even deemed necessary by the institute. Because those engaged in real estate investing are regularly confronted with having to pick between various investment properties which Internal Rate of Return (IRR) fails to adequately provide. As a result it seemed imperative to introduce this return so investors can make evaluations between those investment opportunities on an “apples-to-apples” basis.In order to do this, two components known as the “safe rate” and the “reinvestment rate” have been integrated into the FMMR model by the CIREI. 1) Safe Rate In view here is the rate an investor would “safely” collect on resources placed in an account where it is deemed to be truly liquid and can easily be withdrawn on a moments notice without loss of either principal or interest.The idea is straightforward. If an investor is collecting a positive sum of dollars a month from a particular rental property after loans and income taxes are assessed then it could be presumed that those monies would not be tucked under a mattress. Instead that the investor would deposit those funds into a bank and earn a yield for those funds.2) Reinvestment Rate This applies to funds that would not be required to meet other money needs of the real estate asset and could be “reinvested” in a few other sorts of “run of the mill” investment options therein earning the investor additional after-tax yields known as the “reinvestment rate”. The calculation for FMMR is highly complicated. So you will need a real estate calculator or quality real estate investing software solution to tackle it. So let me just explain what it does in practice with projected annual revenues.First, all negative cash flows that exist are discounted back at the safe rate on a year-by-year basis to year zero (i.e., the investment year) unless they are confronted with a positive cash flow and are eliminated. Then the positive cash flows (if any are present and still exist) are compounded forward at the reinvestment rate to the year of sale (when you expect to sell the property). Negative cash flows that do survive the trip are combined with the initial investment in year zero, similarly the positive cash flows are combined with the cash proceeds in the year of sale, and each and every year in between become zeros.Consequently, despite the number of annual revenue projections you are making, the schema will always result with year zero consisting of a sum total of negative dollars, the sale year a sum total of positive dollars, and for the years in between, zero. Okay, now the schema is correctly constructed we solve for the financial management rate of return (FMRR) merely by using that schema and computing the internal rate of return (IRR).tn pas cher nike tn pas cher

James Kobzeff is the developer of ProAPOD – leading real estate investment analysis software solutions since 2000. Create rental property cash flow and rates of return analysis and marketing presentations in minutes! Includes Financial Management Rate of Return. Learn more =>
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