# How do you know if you're winning or losing?



## faline (Feb 10, 2011)

I decided to rent out my property in Ottawa when a different living situation came up (I rent now).

I re-did the numbers on my mortgage so that the rent I receive from my tenant covers the principle, interest, property tax, condo fees, insurance. I'm basically breaking even now.

Lately I've been thinking I should/could be more agressive with my mortgage payments to pay off that debt sooner and therefore pay less tax in the long run. but I wouldn't be breaking even every month anymore.

But then does that make it a bad rental property? 

I don't really want to sell and leave the real estate market now that I'm in it. Plus I might want to live there again.

Advice/thoughts?
thanks


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## HaroldCrump (Jun 10, 2009)

The most commonly used metric for evaluating R/E rental investments is _*cap rate*_.
So without those numbers, it is hard to tell how profitable your R/E venture is, and how does it compare with the risk-free market rate (GIC or govt. bond).

However, just based on what you said above, it does not sound like it is very profitable.
Do you have a maintenance/repair fund?
If not, how do you plan to address property repairs and improvements?

Also, what about your marginal tax rate on the rental income?
You should account for that as well.

Paying off the mortgage will help improve your cash flow, but not as much as you might think because the mortgage interest is tax-deductible.


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## Karlhungus (Oct 4, 2013)

If you pay off the property off sooner you will pay more tax as your rent will probably rise over time as well as the debt being gone. You will have less deductions.


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## Mortgage u/w (Feb 6, 2014)

The fact you are breaking even at this point does not make the investment all that good. When you factor in taxes (unless you break even on your T1 as well), your actually in the red.
If you increase your payments, although it get paid down faster, you end up reducing your cash flow and increasing your taxes later on since you will have a bigger surplus of income.
Focus on getting a positive cash flow - either increase rent or maximize mortgage amortization so your payments are as low as possible. Interest is a write-off so the longer you have the mortgage, the more you benefit. If you plan on living in it later on, then you shouldn't look at is as an investment and worry about cash-flow.


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## Just a Guy (Mar 27, 2012)

Just looking at what you told us, which wasn't much, I'd say your "investment" isn't all that good, but you never provided us with any numbers.

Then I calculate my properties, I also factor in my down payment, maintenance, and a profit.

Now, it doesn't mean you've got a bad property, there is grey area in investing as well...

I too would advise you not to worry about the mortgage, it's one of the advantages to real estate investing, plus it reduces your taxes not increases them...I'd look more into ways you could increase your rent or income from the property.

The one thing you, and most novice real estate investors forget is that in real estate, you have to think long term...like a decade. Can this cash flow long term, after an interest rate hike, what repair costs are coming, etc. the cost to get out takes about 5 years to just break even assuming no decline in prices...take a step back and look big picture, that will tell you if this is a good or bad property.


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

Interest on an investment property is deductible. If you pay off the mortgage you lose the deduction. Also if the mortgage interest is low, you should be able to make more by investing the money elsewhere, than by paying it off.


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## nathan79 (Feb 21, 2011)

Look at the number at the bottom of of your T776 (rental income/loss) and divide by your equity to obtain the percentage of profit on your investment. Let's say you earned $6000 and your equity was 200K, so your return on investment is 3% (less than that once you account for taxes -- but you'd have taxes on any investment).

I think it's just a tough market to be a landlord due to the fact that housing prices have doubled in the last 10 years, but rents over the same period have only increased by about 15-20%.


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## faline (Feb 10, 2011)

Thank you all for the feedback. So if my rental loss divided by equity is in the negative (-0.163) i'm probably not doing too well...


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## Mortgage u/w (Feb 6, 2014)

faline said:


> Thank you all for the feedback. So if my rental loss divided by equity is in the negative (-0.163) i'm probably not doing too well...


I don't think you should be doing any calculations if you already have a loss. If you can't cover expenses, its clearly a poor investment.


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## the-royal-mail (Dec 11, 2009)

Don't forget that while your capital is tied up in overpriced RE your money is not gaining in the stock market. So you have to include that lost opportunity as well.

This is why I keep saying around here that RE and landlording is simply not all its cracked up to be.


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## Just a Guy (Mar 27, 2012)

To be fair, the same could be said of any type of investing. Some people make money in it, some people don't. There are some who always make money no matter the conditions, and there are some that always lose money...most people fall in the middle.

Investing is work though, it you're not willing to work, your chances of losing money are quite high. Buy and pray is not a good strategy for any investment.


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## Mortgage u/w (Feb 6, 2014)

Just a Guy said:


> To be fair, the same could be said of any type of investing. Some people make money in it, some people don't. There are some who always make money no matter the conditions, and there are some that always lose money...most people fall in the middle.
> 
> Investing is work though, it you're not willing to work, your chances of losing money are quite high. Buy and pray is not a good strategy for any investment.


Very true....however, when you can already calculate that your RE investment at best is 'breaking even', its a clear sign that its not a good investment.


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## Just a Guy (Mar 27, 2012)

Yeah, I was replying to the Royal Mail. In this time, real estate is tough because it's hard to find a good property but, unlike the stock market where the price (or overprice) is the same for everyone, in real estate there are circumstances which allow you to find good investments. So, while I agree with people who say real estate is overpriced in Canada, I still think you can find good investments in Canada, and that's why I buy them.

The same can't always be said of the stock market...which I personally find hard to buy in right now.

One has to run the numbers and find really good deals today to ensure you'll be okay in the long run, expecting a correction.


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## the-royal-mail (Dec 11, 2009)

JAG, I know that you will always defend RE because it has done well for you. I'm sure you put in a certain amount of study and effort and that the numbers work for you, assuming you calculate all of the costs including your time. But to suggest that RE and stock markets are somehow equal and that some people win and fail at both, is false. Yes, everyone has a different situation but for the vast majority of specuvestors we've seen around in CMF and elsewhere, RE really does not work for them when they consider *all* of the costs.

Frankly, most people are far too heavily leveraged in RE as it is. These same people might have $5000 in MFs, have done poorly in "investing" and think that investing sucks. MFs suck, investing as a whole does not. For sure, people need to give investing a more serious try and put a little more effort into researching it and not just buy and pray as you mention. There ARE good investments in this day and age. One of mine has made me 10% in just 1 month just by a few mouse clicks and $9.95 in fees. Have any of your rental properties done that? How many of these specuvestors have tasted that kind of success? How many have failed as outlined in this thread?


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## Just a Guy (Mar 27, 2012)

Actually, one of the places I bought in December ($75,000), closed the end of January, it sat empty while we worked on the other one we bought for 1.5 months (about $500 in condo and carrying costs) we fixed up the interior ($5000) and had an unsolicited offer of $127,500 from a friend of someone in the same building (no realtor involved even, so only costs would be legal fees). Even without the offer, it generates $1125/month. So, I guess you could say yes, even though I'm not a fan of flipping properties, I have gotten similar returns.

Also, all this was done using other people's money while mine was invested elsewhere.

I agree with you though that most of the "investments" being floated are money losers, especially when you consider the long term. However, lumping all real estate in the "can't be done" category because the market is overpriced is wrong. I've managed to pick up 5 properties now in the past 6 months, none over $85k, none costing more than $5k to improve and none renting for less than $925 (average rent $1150/month). Three are mortgaged for the cost of acquisition and improvements, and the other two are in the process of getting mortgages.

I know people personally who've continually lost money long term in the stock market. I look back to the mutual funds I originally bought when I started and see very poor returns on my "professionally" managed portfolio...it's, fortunately not a lot of money, but difficult to move without penalties which would wipe out any gains. When I decided to start DIY investing I did a lot better...I personally like the stock market, but I do think it's also in for a correction. 

I would also point out that many stock returns are not considering all the costs either. If you buy American companies, you also have to consider the exchange rate and taxation. People who bought when the dollar was closer to .50 didn't do so,well when the dollar rose to par, even though they had returns, they lost half their value pretty quick. If you trade, or even sell often, you trigger your taxes...

As I said, there are certain people who'll make money in something despite the climate around them...I'm sure there were people who became wealthy during the depression even. There is no one place, one type of investment, that will make everyone money. There will always be ways to make money for those who know what they are doing, in anything.

To say it's impossible because most people can't do it is also wrong. How many people on these threads even have a list of potential properties emailed to them daily, vs the number who say that you can't find cash flow properties in Canada and there's no way you can find places? How many scan multiple provinces, as opposed to a three block radius in downtown Toronto or Vancouver? How many of them know where to get supplies at hugely discounted to retail prices?

I agree, you buy a place in downtown Toronto, hire contractors, and an overpriced property manager and it's unlikely you'll ever see any chance of not losing your shirt in real estate. Then again, if you buy "safe" companies, darlings of the investment world, like Nortel, breX, Worldcom, Enron, Leaman brothers, etc, you won't be doing much better. Remember, in their time, they were all considered great companies...how many of the current ones out there may follow? How many (AIG) should have but didn't?


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## marina628 (Dec 14, 2010)

So what happens when you pay them off?Do you recommend to buy more to offset expenses?Obviously you pay off your personal residence before a rental but what do you do if you have no debt and the rentals are nearly paid off resulting in higher net income?


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## carverman (Nov 8, 2010)

Winning or losing?..what I would like to know...How do you know if you are living with an alien.:biggrin:


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## Just a Guy (Mar 27, 2012)

marina628 said:


> So what happens when you pay them off?Do you recommend to buy more to offset expenses?Obviously you pay off your personal residence before a rental but what do you do if you have no debt and the rentals are nearly paid off resulting in higher net income?


Depends on your personal goals and age. If your average income is let's say $600/month after expenses (maintenance, property taxes, management and insurance would still eat up $4-500/month) owning 10+ could provide you with a fairly good retirement income to live off of. 

Personally, I'd like to pick up as many as I could while I'm still youngish to provide a steady income for my entire family. If my kids never have to work (not saying I don't expect them to work, there's a difference), I'd have enough.

I'd refinance them to buy more to start, if properties were available at the right price (there were several years where I didn't buy because prices were too high). Being able to make an unconditional offer is part of what allows me to buy theses places at the prices I'm paying, having equity in other places gives me the credit to pay for new ones outright. Of course, if interest rates go up (and they will) you need to factor that in so you don't get into trouble long term.

Of course, when they are all paid off by my renters, I could sell them off as well...even if the house prices go down, it's a profit as long as the rents always covered the payments as I didn't put any of my money in...it would also be a capital loss, so tax free. In reality, I expect their value to keep up with inflation at least, so I'm "creating" money for my family out of nothing (the amount I personally put in) and protecting it's buying power into the future.

I've structured the ownership of my properties to benefit and protect my family...after that generation, I can't really control anything, but I spend a lot of time teaching my kids so hopefully they can keep passing on the knowledge and benefits. As my kids age, I expect them to become more involved in the business of ownership.

Of course, I also have stocks and my companies to deal with as well...I believe in real diversification. Not all my eggs are in real estate. Unlike the "diversified" people with all their money is various stocks. Currently, my best returns are coming from real estate...around 2007/8 it was coming from the stock market...my businesses, aside from when I got injured, provides steady, consistent growth.

As I write this, I notice my best growth comes from markets in times when people say to stay out of them, or there's no money to be made...


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## Mortgage u/w (Feb 6, 2014)

I think the people saying to stay out of the RE market are simply reflecting what they see with the increase in price of owner-occupied properties. And they are influenced with all the media hype out there about bubbles, hikes and crashes. I tend to believe these same people do not own rental properties (or profitable ones).

So....the details in this thread are clear that there are winners and losers in all types of investments. Just like you need to pick the right (or winning) stock, you'll need to do the same with a rental property, business, or any other investment you desire.

I'm personally invested in stocks, real estate and a business. And I can attest that I am 'winning' in all three. The choices I made may not be the same for everyone, however, I am comfortable with my choices and so far so good.

There are one-offs in all investments. You can gain 10% in a day, month, year...just like you can lose 10% in the same period of time - and this applies to ALL types of investments. Your judgement is what will determine the + vs -. And your judgement is not to be obsured by what you _think _the return should be. The numbers are straight foward....if you have a negative, do not pretend the (-) is not there.


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## the-royal-mail (Dec 11, 2009)

You're right, u/w.

I am often puzzled at the emotions surrounding RE. Even if they lose money or break even after X years, the holders repeat the rhetoric about RE being an investment and that those who rent are somehow throwing their money away. YES, everyone has a different situation and I think that is what often gets lost. How many threads have we seen here from young couples thinking that ANY type of RE is an investment? We've seen it all, from overpriced condos in Toronto and VCR to run-down abandoned houses in Detroit to fixer-upper houses in unsafe/crime-ridden parts of the city. They seem to feel that RE, no matter where and no matter the price cannot lose.

I know you and JAG make a lot of great points on this and JAG seems to have found a good formula that works for him. I'm just not convinced this is the great deal for the masses of average young couples as they seem to think. Often when you press these folks for details they fail to include all of the costs of owning and maintaining the property. If they're content to break even after owning a place for X years why not just let the money sit in a bank account and save themselves the work.

And then there's the great wildcard of a rise in interest rates that can turn these "investments" into burdens and "underwater" situations in very short order. When the music stops, a lot of young people will be left holding an enormous amount of debt and stress dealing with the fallout.

Again, I know this doesn't apply to JAG as well as yourself and some of the success stories out there. I am just not convinced the majority who attempt this on a part time basis are enjoying the same success. Otherwise we would be hearing a lot more success stories!


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## Mortgage u/w (Feb 6, 2014)

Royal, you hit the nail dead on. When emotions get involved, critical facts become hidden. Similar to someone holding a position on a losing stock - their emotions may keep them from accepting the loss and so they keep holding it convincing themselves its still a good investment.

I am a Mortgage Underwriter so I see my fair share of mortgage loans where the clients holding rental properties with a negative return. I also see investment portfolios where the annual return is negative. Be it emotions, aprehension or a combination of both, I see and hear far too many stories of huge investment losses. 

I once made the point and will make it again - the industry needs to start teaching the popluation about 'money' and 'investments' at an early stage such as secondary school. And the concept about doubling your money on the stock market or retiring a millionaire with rental properties has to end.


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## Feruk (Aug 15, 2012)

Just a Guy said:


> Actually, one of the places I bought in December ($75,000), closed the end of January


JAG, where do you find the properties you invest in? Looking around at a few cities on realtor.ca, you can't find anything for under 100k. If you're buying 6+ properties per year, you're doing this consistantly. How? Can you educate a total RE newbie?


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## Just a Guy (Mar 27, 2012)

I didn't say I did it consistently, I bought 5 properties in the last 6-8 months, the year before we acquired 1, the year before that I bought 2, for several years before that, I bought nothing.

I'm actually surprised at the amount I've found recently.

First thing you need to do is talk to a realtor, one you trust. I have a friend who's realtor bought several properties that my friend found...they were good deals, so good the realtor screwed him.

Next is to make sure your money is lined up. All my offers are unconditional, no inspections, no subject to financing, no nothing...high risk if you're not experienced, but I've been doing this long enough. If you can pay cash (I use other loans like a heloc), you'll be better off.

Next, get them to send you a list of everything that meets the criteria you're looking for.

Personally, I've got several lists like

Everything, not a trailer, under $125k that comes on the market
Every foreclosure
Every apartment building

When something comes up, go look at it as soon as possible, call the property manager, talk to neighbours, find out as much as you can. If the building is in good structural shape, great...if it's ugly inside even better. Paint and floors, kitchens and bathrooms can be easily upgraded (I've got my costs in to under $5000 for a complete update), buildings sinking can't be easily fixed. I try to get small unit condos so I have a say on the board (1 unit of 150 doesn't carry much weight, 1 of 20 not so bad), find out about the finances and overall history.

If it's a good building, make the offer that day, I usually come in at a discount to asking. I've got price ranges I'm willing to pay for a bachelor, 1 bed, 2 bed or 3 bed, that I never go over.

Be willing to walk away. This is business, emotions will get you killed. I put in dozens of offers every year, I don't get all of them.

Don't be stuck on a certain area, I look over a wide area and even keep an eye on different provinces...you don't have to go that far, but I've got a buddy who wants a place within 3 blocks of his office...not likely to happen.

Understand neighbourhoods, most go through a cycle...the start to go downhill (about 10 years), this is when crime, pawn shops, prostitution starts to encroach. Next they stay at the bottom (another 10-15 years) no one wants these neighbourhoods, everybody knows it's a problem...after about 10 years, the police finally start to crack down on the area and it begins to get better (the next 10 years). This is the time to get in. When the signs go up about zero tolerance to prostitution and police crackdowns...the neighbourhood pushes the bad stuff out to a new area (hence the cycle) and it slowly becomes a desirable area.

Don't overdo the renos. These are rentals, make then nice, but not super fancy.

Once the renos are done, apply for a mortgage. Your improvements should increase the value enough to finance it 100%

Screen your tenants.

Get on the condo boards.

Two good books I'd recommend for the newbie

Big profits from small properties. By Michael E. Heeney he's American, and I'm not finished reading it, but it sounds like what I would write.

The simple solution to Canadian real estate investing by William A. Radvanyi he's Canadian, and is a really good beginner's book.


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## Mortgage u/w (Feb 6, 2014)

JAG, one thing you should advise the newbies is that you do this full time and all the legwork and renos are done by yourself. Unless I read you wrong, you would have to be superman to manage all this AND have a full time job.

A newbie will read your post and want to do the same. But his reno costs will be double or triple if outsourced. If funds are limited (usually the case for a newbie), they can run into trouble very fast.

Good points on acquiring RE and great job building your assets JAG......but newbie buyers beware - you will not gain the same experience and knowledge as JAG overnight!


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## Just a Guy (Mar 27, 2012)

Yes this is work. My quote for renos was just materials as well (or should be for a newbie budget, I've managed to cut it down significantly through experience and standardization). It's not my full time work, I run a couple of companies as well but, being self employed, I do have a lot of flexibility with my time. I used to do the repairs and renos myself, but after I got injured I found a good contractor who was very reasonable. If your places are done right, the maintenance is often less in the long run. 

I also really enjoy doing it. I like looking for places and negotiating for them. I'm experienced enough that I don't need a building inspector. I've been doing it long enough that I've got systems in place for the management of things. I'm good at dealing with difficult people and diffusing situations. 

It's gets easier with experience.

You do have to treat it like a business. You can't get upset when you have a bad tenant and your place is trashed. It's not sitting back and collecting cheques. I spend time being on every condo board, I routinely talk to multiple banks, I field calls from tenants...but it can pay well.


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## the-royal-mail (Dec 11, 2009)

Good chat. I think I have to agree with u/w. JAGs posts somehow read as though he's just an average guy but when you read the latest clarifications it's clear JAG is far ahead of rank and file specuvestors. u/w is right -- they'll read his posts and think they can do it too. Well, they can, but it won't be a slam dunk. JAG et al didn't learn that stuff overnight. Takes time to network and develop contacts etc etc. I still don't really think this is suited for the average working stiff.


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## Just a Guy (Mar 27, 2012)

I would think this forum isn't for the average working stiff.

I've never found any investing to be easy. You can't just throw money into stocks and walk away rich either. In fact, that strategy is likely to leave you broke.

I think those thinking about starting a business also know that there are perils. There's a very well known failure rate there that's well documented. 

But, having said that, if you're unwilling to try any form of investing, you'll probably remain poor. I don't know anyone who's gotten rich from a paycheque...I'm sure someone has, I just don't know anyone....I do know a lot of rich people who got there from starting a business, buying stocks, owning real estate, or some mix and match combination. 

I should also point out that there are many other ways to make money in real estate...just as there are investment strategies in stocks...just because I, or someone else doesn't do it that way doesn't mean it can't work.

I think I get most annoyed with the people on this forum who keep saying something can't be done...just because it's not something they do, or are comfortable with. I prefer to help people by guiding them rather than discouraging them from trying.

There are many bad investment ideas floated on this forum, I'll call a spade a spade just like everyone else, but there are no bad categories for investment unless they are scams. You can make money doing anything...but it's hard to make money doing nothing.

Btw, I do think I'm just an average guy when in comes to investing, I have no special skills, didn't come from money, or have a financial education...I got hurt, lost my income and was forced to feed my family (great motivator). This lead me to learn how to make money with very little risk. I couldn't afford to lose money, so I had to be sure I picked a no lose situation. I learned to "run the numbers" before I took risks...I trust my math, and that has been the key. 

Most people are lazy, they want other people to do the work for them. What I do isn't hard, but it is work. I think of it as playing monopoly with real stuff.


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## Mortgage u/w (Feb 6, 2014)

I think we're all average joes on this forum....but then again, average by definition can be a wide spectrum depending on who you ask. What's important is we all share our ideas and personal experiences with results so we all learn from them. True, one needs to try something before saying it can't be done. But some people simply don't have the same abilities as others - and that's fine. Those people just have to understand what the idea entails because many people will underestimate what it takes and will get into trouble. You don't want to get into trouble with your finances. 

Hopefully we learn and understand new investment ideas on this forum because resources out there are very limited. I am not here to judge anyone or their ideas......but I do hope everyone gets a clear message. And a little constructive criticism won't hurt anyone


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## Just a Guy (Mar 27, 2012)

I'd also say that there are some people who just can't grasp the concept no matter how many details you spell out. My parents were like that. They couldn't invest in anything without losing money. Statistically speaking, they should have been right once in a while through shear luck...most of my generational relatives go as far as mutual funds managed by "experts". 

All of them think I'm crazy to invest on my own...very supportive that way.

Of course, out of all the people I try and tell how to buy real estate, or stocks, or start a company I only know 1 guy who actually went out and did it (I helped him buy his first place), he's still scared of stocks mind you.

On this board I've PM'd a few others who seem to have at least started looking...but most people would rather I do the work for them.

Perhaps that's why I'm a little sensitive to people who say it can't be done.


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## SkyFall (Jun 19, 2012)

boy that was a great lecture I just had! it's amazing how much you can learn from others just by reading. Thanks guys!

as a young investors, mostly stocks (still in school), I am amaze by how much it is easy to learn nowadays I mean you get get tons of info just with few clicks (of course you have to be careful with the sources).

cheers guys!


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