# Tell me not to do it



## 2tire2work (Jul 20, 2013)

I want income properties so I can retire. I own a business and it requires lots of involvement. I work at least 60 hr weeks and it is impossible to hire people to replace me. I am thinking of selling my business and buy houses to rent out.

Here is the numbers. Spend 800k to buy 2 new houses in new neighbourhood. Estimates annual profit of $57k. Houses will be paid in full. I am very handy can fix anything. I will treat this as a business and manage it myself. I had a rental years ago and didn't like the collection part of the business. But I think I am older and wiser now. 

I did read the thread about real estate vs. other investment. And I like the part about real estate is that I get to see it. 

Thank in advance


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## Chris L (Nov 16, 2011)

Can you not find something cheaper? Seems like you might want to consider a location with houses less than 400k and a better return or park the idea until you can. You'll be able to weather a drop in RE, but do you want to be in a negative position for 10 years or more. Seems like a bad time to jump into the market IMO.


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## none (Jan 15, 2013)

Want to commit financial suicide? DO IT.


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## james4beach (Nov 15, 2012)

May be appropriate that this is my post # 911



2tire2work said:


> Here is the numbers. Spend 800k to buy 2 new houses in new neighbourhood. Estimates annual profit of $57k. Houses will be paid in full.


Paid in full means that you have $800k sitting in an account somewhere? You will do this without taking on any debt? Do you have debt anywhere else?

As a thought experiment... what if you were to buy $800,000 worth of ZRE. Would you be comfortable with that investment? After all this would also be real estate investment, it would yield 5.81-0.62 = 5.19% or $41,520 yearly. This is a passive investment that requires zero work, earning you $41.5k versus the $57k you estimate with direct ownership... that's $15.5k less income in a year. But what about the value of your time, energy, and stress?

Income from direct properties = $57k - value of personal time
Income from REIT ETF = $41.5k

Assuming your professional time (plus let's add a stress premium) is worth at least $60 an hour, that difference in income equals 258 hours of work or 5 hours per week. If you're going to invest in these properties directly, do you think you will spend *substantially less than 5 hours a week* on all the mechanical repairs, paperwork, interactions with tenants, collection difficulties, and occasional major headaches?

I think that's a key question!

Overseeing two properties could I think easily take 5 hours a week or more. Personally I expect that your income, net of time & energy, would be about the same as with the ETF. So this leads to the second hypothetical question... if it's more or less the same to buy $800k worth of ZRE, what are some reasons you wouldn't want to do that?

The answers translate to your original real estate idea:

a) you are heavily exposed, non-diversified, in one specific investment (even more so the case in the direct ownership case)
b) you may be buying near a national historic real estate peak
c) you could lose a lot of capital if the RE market goes sour (yes REITs are leveraged=worse, unlike you, but also REITs are diversified=better, unlike you)
d) the level of income you receive could drop
e) you are screwed if interest rates rise


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## lonewolf (Jun 12, 2012)

If you want residential real estate maybe consider a private riet such as centurion (SP?)

I would not touch real estate untill the K wave bottom


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## My Own Advisor (Sep 24, 2012)

I'll tell you not to do it 

Buy ZRE or XRE or own a few of those REITs and Real Estate stocks instead. Then retire


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## Xoron (Jun 22, 2010)

james4beach said:


> .
> a) you are heavily exposed, non-diversified, in one specific investment (even more so the case in the direct ownership case)
> .


One other thing to consider is geographic risk. What if that new neighbourhood (where you've purchased both of your investments) has a localized problem?
- High water table flooding the basements
- Gas spill contaminating the soil
- Becomes the "bad part of town"?

Of course, these things are a bit of a stretch for sure. But you should think about this if you're going to put all of your eggs into the RE basket. 

One other side note, why not try and grab three properties with a manageable mortgage on each? Increases your exposure to RE, but you could likely net more rent a month using leverage. 

But, I'd skip it all and invest the money


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## Chris L (Nov 16, 2011)

Let's also not forget that IF the **** hits the fan, the OP can simply get a job.

He owns a business right now, he's looking to switch careers. Presumably he already has all his eggs in one basket right now (his business) which is also not diversified (presumably).

Perhaps you can shift things around a bit. Buy some private REITS, buy some ETF's and buy some local RE. Then if things don't turn out right, offset with part-time work.

Do you have personal RE? Is it paid off?


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## blin10 (Jun 27, 2011)

if you already own a house, blowing another 800k into a real estate is not a smart move, you'll be 100% invested in RE... why not buy 100k or reit, 100k of pipelines, 100k of telecom, 100k of utilities, 100k financials, etc, etc... you'll be way better off doing that


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## 2tire2work (Jul 20, 2013)

Chris L said:


> Let's also not forget that IF the **** hits the fan, the OP can simply get a job.
> 
> He owns a business right now, he's looking to switch careers. Presumably he already has all his eggs in one basket right now (his business) which is also not diversified (presumably).
> 
> ...


Exactly. My operating cost 30 to 40 k month. I have all my money and time invested in my business. Buying re is like changing career and make money in a different field to work less and make less. 

I don't go see financial advisors for the same reason. They tell me the same thing. You are young and make good money. You can accept higher risks and hope for the long haul. But my business is a high risk investment. A very high one indeed. 

I care less about my re goes from 800k to 600k if the housing market tanks. I am more concern about the rental income. I assume more people will rent if the market goes down so they can get better deal down the road. I am in it for the long haul. I am interested in brand new houses for the less repair works. 

If I want to sell my business for 500k. It's only worth as much as the guy who offered me 320k but I know my revenue and I will just keep on working and still make money. Businesses are like re. Only worth as much as someone willing to pay for it. 

So everyone says no. And I will take your advices and keep on working while trying to get more educated in investing. 

My personal re is paid off. I have lived in this city all my live and I know it well. But i agree putting all my money on real estate is a bad idea doesn't matter how good I feel about it. 

Thanks for everyone's advise!!!


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## KrissyFair (Jul 8, 2013)

My primary concern from what you wrote is that you may be seriously overestimating the profit. You put $57k annual profit from 2 houses. You'll have to cover about $8k in property tax and let's say you've also got $300/month for insurance, water, sewer, solid waste. You'd need to rent those places for more than $2800/ month to clear that profit without doing any repairs or maintenance. I don't know what city you live in, but that sounds risky. If the RE market does in fact go down, then a person who can afford $2800 in rent is going to be the first to take advantage of the softer market and buy.

Another thing, IF you do this, don't buy 2 houses in the same neighbourhood. Spread out a bit geographically to mitigate some of your risk. Ditto with price range. Could you buy one $400k house, a $250-$300k town or upscale condo and a $100-150k more basic condo? That way you've got your renter pool a bit more spread out as well.


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## iherald (Apr 18, 2009)

It doesn't say where you are. But why not buy something in a location where you can get a better return? Buying in Buffalo or Cleveland, you can buy a house for $50,000 and rent it out for $1,000 a month (if you buy a duplex and each is rented out for $500 which is reasonable). So your $800,000 would buy you two houses in your area or 16 houses in Buffalo. In theory, those 16 houses would bring you gross rents of $192,000 per year

You wouldn't be able to do the work yourself, you would hire someone. That's going to cost you 10%, and another 10% to find tenants. So after paying your property manager you'll be at approximately $150,000. You'd have to pay property taxes etc etc, but it will still be much higher than your numbers in your local area. Plus, you do no work other than look at properties

The other advantage in buying in the US is that the real estate market there has already dropped. In Canada, it might drop in the future (it might not, I don't have a crystal ball). You are also exposed more to the US dollar, which can either be a good thing (it has been for the last year) or a bad thing depending upon your thoughts on that.

Obviously the biggest issue you will have is finding someone in the local area you can trust. My Buffalo property manager / real estate guy usually says no to 5 properties I'm interested in before he suggests I put in an offer on 1. He can say no because of area, condition of the home, crime, bad previous owners (who wouldn't take care of the place), etc. All things that I wouldn't know.


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## 2tire2work (Jul 20, 2013)

It was supposed to be 2 houses on the same street for ease of management. 
I looked at condos but the condo fees reduce the profit by too much.


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## 2tire2work (Jul 20, 2013)

I am not ready to invest in the foreign country yet. I was comfortable to buy two house in my own city because I live here all my live and I know it well.


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## Cal (Jun 17, 2009)

I know a few posters have offered the option to buy REITs, you may want to consider some dividend paying equities as well. As you seem concerned about generating income.

Both REITs and dividends have more tax advantages over rental income, definitely something to consider (which I don't think you have done yet), as it isn't how much you make, but how much you keep.


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## Chris L (Nov 16, 2011)

I wouldn't totally abandon the idea, but your market timing is a bit off. I would also like to get back in, but not at these prices and returns. Keep milking your business for as long as you can and tuck that money aside. Maybe trying to buy a rental with cash could be a good goal and tide you over as the market settles down.


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## My Own Advisor (Sep 24, 2012)

Real estate just has so many risks. Again, wouldn't do it. Diversify.


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## 2tire2work (Jul 20, 2013)

Definitely I will look into REIT.


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## james4beach (Nov 15, 2012)

Others have said this too... it sounds like your primary concern is generating income, and don't care so much about fluctuations (or declines) in the capital amount. In that case you may really want to go the ETF & REIT route because you'll get some diversification.

That being said - I want to warn you -

It's really easy to misunderstand or get the wrong idea about what these stocks and ETFs can do for you. You need to do a lot of reading, and take it slow. If not done carefully, going the stock route could become much more dangerous than your original real estate idea!

Ultimately they are stocks and they come with a lot of danger. During the US financial crisis for example the Canadian REIT index fell by -58%... even though Canadian real estate was mostly OK. So just imagine you start with the 800k investment and look at your balance and now it's 333k (even after receiving income). That happened to tons of people, and things like that are going to happen again. For instance if Europe collapses, which some experts believe could happen any moment. Sometimes prices will bounce back, other times they won't.

Furthermore the income these things generate is not guaranteed to stay constant, and certainly could decline. You could get a simultaneous decline in both the capital and generated income. That would not feel very good. It's already started happening to utilities stocks, like ZUT the ETF, and could happen to REITs too.

Finally (maybe most important), the idea you have here ... plowing a ton of capital into income-generating assets... *is an extremely popular idea*. It's all the rage, ever since Bernanke took US interest rates to zero. Because it's a very popular thing to do, it means that investors have pushed up the prices on these things. In stock market terms, it's a "crowded trade"... there's a crowd of people who all want to do the same thing. That's usually not a good thing in the investment world. You can see lots of evidence even in these forums, because there are a zillion threads about 'dividend income' or 'dividend stocks' or 'dividend ETFs' or 'investing for income'. Over and over and over again. It's a crowded trade. It's likely that everyone is over-paying.

With those caveats, here is an example idea that's not terrible
600k in ZRE (REITs), pays $31.1k per year
100k in XDV (div stocks), pays $3.6k per year
100k in ZUT (utilities), pays $5.2k per year

Deployed in this way, that 800k would currently pay around $40k a year (a 5% yield net of ETF fees). But again please consider my warnings, notably that the income they pay out can decline. ZUT's has already started declining. Personally, I project that the income paid by both ZRE and ZUT will decline over the coming years.


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## Jungle (Feb 17, 2010)

I didn't see this mentioned, but the income tax paid on $57K of rental income is going to take some of that..it's like receiving an annual salary. 

If you can consider using your TFSA, RSP and non-reg accounts, you could buy dividend paying stocks or REITs above and defer/ avoid or use tax credits and _possibly_ match the income paid, after taxes. But this could be a riskier strategy for you because it would require buying your own stocks.


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## 2tire2work (Jul 20, 2013)

Very good explanation. Thanks. I will spend some time to digest before I jump in.


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## 2tire2work (Jul 20, 2013)

Real estate doesn't look so good anymore because of tax rates.


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## Jungle (Feb 17, 2010)

I share the same opinion and receive rental income myself, it's not very tax efficient income, especially when you start getting into higher tax rates.


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## james4beach (Nov 15, 2012)

I don't hold any REITs myself... can someone comment on their tax experience using for example XRE or ZRE? It sounds like the tax implications versus rental income is going to be a big consideration here for the OP.

As I understand it, REITs distribute capital gains (favourable taxation) plus return of capital -- in this case it's a "good" kind of ROC (since it's from asset depreciation). It would impact your adjusted cost on the shares, and you won't pay tax each year on that part of the distribution. Instead it adds to your capital gains when you eventually sell the shares.

For instance the breakdown of ZRE's distributions last year
44% return of capital... favourable, a deferral
29% capital gains... favourable
26% regular income... fully taxed
2% eligible dividends... favourable


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## Cal (Jun 17, 2009)

I only hold REIT's in my TFSA, to avoid all related tax issues.


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## Rusty O'Toole (Feb 1, 2012)

Don't do it. You can do better with less hassles in other places than real estate. I say this as a real estate investor with years of experience. The main thing that makes real estate a good investment for the individual is leverage. By buying with a small down payment you multiply your gains - if you have any gains.

In your case this does not apply if you buy the properties for cash. You will get all the disadvantages of real estate without the biggest advantage.


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## marina628 (Dec 14, 2010)

I have significantly more cash than you and I would never buy a $400,000 property to rent out.I do have rentals that are worth $400,000 but I bought them more than 8 years ago for half that price. If you want to get into rental buy a $50,000 condo in Florida that will rent for $1000 a month ,minus the $300 a month in expenses you are still getting a good ROI.Any real estate agent in Florida can hook you up with a property manager that will take 10% to take care of the rent plus remit the tax to the Government for you. I am buying with 25% plus closing down as we get to write off the mortgage on the taxes which increases ROI.


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## Mall Guy (Sep 14, 2011)

james4beach said:


> I don't hold any REITs myself... can someone comment on their tax experience using for example XRE or ZRE? It sounds like the tax implications versus rental income is going to be a big consideration here for the OP.


I don't hold either XRE or ZRE, but a number of REITs directly. Note that from a tax perspective, not all REITs are created equal. I hold all but one in tax sheltered accounts. Some have serious tax issues (CCA), and some are very good tax-wise for unit holders. I'm just too lazy to look into it, hence keeping them in shelter accounts.


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## 2tire2work (Jul 20, 2013)

Rusty O'Toole said:


> Don't do it. You can do better with less hassles in other places than real estate. I say this as a real estate investor with years of experience. The main thing that makes real estate a good investment for the individual is leverage. By buying with a small down payment you multiply your gains - if you have any gains.
> 
> In your case this does not apply if you buy the properties for cash. You will get all the disadvantages of real estate without the biggest advantage.


Very good point!!!


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## liquidfinance (Jan 28, 2011)

Hmm Interesting thread and some great points from James. I'm currently trying to decide what to do with my property in the UK and after reading through this I think I am more inclined to sell than rent.


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## frostar2000 (Jul 27, 2013)

My family owns 25 rental houses. We're currently interested in shifting from passive income to active income. We're going to start doing flips and building new houses and selling them and we need access to our equity. We could sell you $750,000 worth of houses that'd generate $60,000/year net income after property tax, insurance and property manager. Our property manager manages 800+ houses and can deal with repairs, maintenance and tenants. They only charge $85/month per house and don't charge extra for maintenance. For example, many property managers would take a $100 plumber charge and charge you $115, $15 extra for them for dealing with it. My property manager would only charge you the $100. They have several contractors and individual trades people who can tackle any problem and they give them all keys. So if there's a plumbing issue, they call the plumber, tell them to go to the house and fix it and the plumber uses their own key, lets themselves it. The property manager only gets paid for calling the plumber out of their $85/month for that house.

Our property manager is very strict on and up to date on all the codes and regulations. He doesn't allow any of his owners to cut corners and have any houses not up to code. So even, if I wanted to, I couldn't cut corners on these houses. Most of them have new or newer floors, bathrooms and kitchens. 

I could sell you $800,000 worth of houses too. But I wasn't sure if you were spending all your savings on this investment or not. If you have back up money to cover the repairs, maintenance and the vacancies, then feel free to spend $800,000 on your investment. But if you are spending all of it, you should probably keep $50,000 for back up money.

We're in Regina. Here's a few links about the Real Estate and Economy of Regina:

http://www.moneysense.ca/2012/05/29/where-to-buy-now/
http://www.leaderpost.com/news/Regi...boom+city+Canada+with+poll/8421786/story.html

Regina has low vacancy rates and a booming economy.

I agree with Rusty O'Toole, you'd be missing out on the leveraged benefit of Real Estate investing. We could sell you $500,000+ or so worth of down payments in Real Estate and you'd get at least 10%, $50,000/year net income after property manager, property tax, mortgage and insurance. And your tenants would pay down your mortgages by over $50,000/year. So combined it would gross over 20% ROI but that's before any unexpected maintenance or repairs. We could personally sell you $500,000+ worth of 20% down payments in our houses. But we know other Real Estate investors in Regina who could sell you the rest of $800,000 by the end of the year, if you're interested. All our houses generate at least 10% ROI after fixed expenses and 10% return of equity on the mortgage principle. That's assuming 3.1% mortgage at Scotiabank (we have a great mortgage broker there that's great at financing multiple rentals at the same time). So if you got $800,000 worth of houses from my network, you could generate $80,000 gross income and $80,000 mortgage principle repayment. And some houses are closer to 15% ROI too but I just want to give you a conservative guaranteed 10%.

Another benefit of using a property manager instead of doing it yourself is that you have a lot more free time. You could go from 60 hours/week of work to 5 hours/month of work. I'm young, I'm excited about actively working on flips and building houses and I have enough time to recover if it doesn't work out but if I were thinking of retiring, I'd be excited about having passive income and lots of free time. And in a few years, I'm going to shift back to rentals anyway. Of our 25 houses, we're only going to sell about 17, we're still keeping 8 of them for at least 4 years. If we had an extra $500,000 lying around, we'd just keep all the houses and use that money to invest in flips and new builds. But since we don't, have we have to sacrifice a good long term investment for a good (hopefully) short term investment.

I haven't done any Real Estate deals with people long distance before but I have a mentor/friend who owns hundreds of homes and has partnerships with dozens of people across the country, so he routinely buys for or sells houses to his network in other cities in Canada and he can walk us both through it.

Send me a private message if you want to know more. We can arrange to talk on Skype. Of course, if we did any deal, we'd use mortgage brokers, lawyers, realtors and appraisers. And do everything through the regular channels.


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## MoreMiles (Apr 20, 2011)

james4beach said:


> I don't hold any REITs myself... can someone comment on their tax experience using for example XRE or ZRE? It sounds like the tax implications versus rental income is going to be a big consideration here for the OP.
> 
> As I understand it, REITs distribute capital gains (favourable taxation) plus return of capital -- in this case it's a "good" kind of ROC (since it's from asset depreciation). It would impact your adjusted cost on the shares, and you won't pay tax each year on that part of the distribution. Instead it adds to your capital gains when you eventually sell the shares.
> 
> ...


With ROC, your ACB is constantly changing... If you also do DRIP, can you imagine the headache of tracking and calculating taxes for this ETF? If you have 2 or 3 of them... OMG, it's a full time work to own REIT, as bad as being an actual landlord for physical buildings in my opinion.


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## dBII (Mar 12, 2013)

Interesting read. Personally, I bought into low-end housing and have acquired a reasonable return with very little hassle in owning rental properties. The 3 units are mobile homes in a strata subdivision and I basically net $2000 per month after strata, property taxes and insurance. They are local, I do most of my own maintenance and don't want to rely on property managers. To me all of the discussion focuses on whether it has tax advantages, return on capital etc ad nauseum. For me it is a simple way to generate good cash flow. My investment was about $340k, cash. So, my ROI in simplistic terms, is around 7%. If the market fluctuates, these properties will depreciate much less than higher end properties. They are also way easier to rent, and if someone trashes a unit, mobiles are very easy to repair or replace. That being said, I do my due diligence before and during occupation and was only really hassled by bad renters when I first bought them.

I consider my rentals to be the core of my early retirement plan (55) since I don't have the luxury of a pension. Please feel free to redirect my thinking, but the concept seems so simple to me. In ten years, I will either sell, or consider a property management company. Right now, I have owned them for 3, 2 and 1 year respectively.


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## james4beach (Nov 15, 2012)

MoreMiles said:


> With ROC, your ACB is constantly changing... If you also do DRIP, can you imagine the headache of tracking and calculating taxes for this ETF? If you have 2 or 3 of them... OMG, it's a full time work to own REIT, as bad as being an actual landlord for physical buildings in my opinion.


No point in DRIP'ing, the original poster is after income cashflow. He wants all that cash. But yes even with DRIP not being done, there is still some work tracking the ACB.

It's really not that bad to track. But I certainly wouldn't own 10 individual REITs... use an ETF or two. It's not that much paperwork, really especially with the buy & hold proposition the original poster made.


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## marina628 (Dec 14, 2010)

My husband and I got into the rental business years ago also because we did not have pensions to look forward to.We figured since we could tie up the down payment indefinitely and my husband is handy with many things we could do it.Probably our only regret was not buying more 5-6 years ago.But it is not for everyone ,it certainly helps when you know how to change a set of taps and other maintenance things .One of our tenants told us her landlord use to go to money mart to cash the rent cheque 3-4 days early every month and he eventually lost the house.IMO you don't have to buy 25 houses ,you just have to buy the right house in right location.I realise if we bought in Florida in 2005 we would be having a different conversation today .Anyway I went fishing today lost my favorite bobber in the weeds , I have reel problems


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## kcowan (Jul 1, 2010)

marina628 said:


> Anyway I went fishing today lost my favorite bobber in the weeds , I have reel problems


:encouragement:
Stay away from the weed marina!


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