# Second House a Good Deal?



## Bobcajun (May 15, 2018)

As I mentionned on one of the other threads, with this low interest environment, I am looking at the possibility of a second house, more im the country.

I have to be able to justify it financially, though. I recently saw a house, a triplex on a lake, actually, which might eventually sell for $550,000.The triplex is appealing in some ways because I would be along distance owner and this would mean that there are some people keeping an eye on it. { I do have some friends in that area who could keep an eye on them}. But, it would be nice to have someone on the premises so to speak. i have heard a lot of stories about break ins in fairly isolated places. This should prevent this,'s famous 1 percent of the purchase price in rent. But, I think I could get enough to cover the mortgage payments and get to use it myself.

Rent now charged per month: 
$2000+$1400+$900. I would take the $900 apartment, which would be plenty big for us. 
That leaves a rent of $3400 per month. The mortgage would probably cost me $2000 per month, Then of course utilities, taxes and repairs to pay. 

I am not a professional landlord and I think I would be happy just covering my mortgage. I know that people on this forum have many different and interesting ways of looking at things like this and I would appreciate any comment.
thanks bob


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## KaeJS (Sep 28, 2010)

I'm not a professional landlord, but I do rent two townhouses in the GTA.

My main concern is you said it's more in the country... How much more "country" is it? Is it easy to find people who can afford to rent or want to live there? Are there jobs around?

You would know the rental market there better than anyone on this forum.

If you feel like there is a market for renting it, then why not do it? In the city, there is an unlimited potential for renters. My only concern would be your area.


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## Bobcajun (May 15, 2018)

KaeJS said:


> I'm not a professional landlord, but I do rent two townhouses in the GTA.
> 
> My main concern is you said it's more in the country... How much more "country" is it? Is it easy to find people who can afford to rent or want to live there? Are there jobs around?
> 
> ...


THANKS KAEJS
iT IS pretty close to a town. But, the question was more on the merits of the buy based on simply covering mortgage, and not making a higher return. 
thanks bob


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## KaeJS (Sep 28, 2010)

It is difficult in this day and age to make a high cash flow positive property.

Even with rates being extremely low, the value of the houses has risen (obviously). So, this actually works backwards most of the time. When rates are higher, rent usually costs more and landlords can fetch more for their properties. In the low interest rate environment we have, most people are "strapped". Things don't move wildly in either direction. Rents are unlikely to increase very much at this point which makes turning the property cash flow positive difficult.

To give you an example, one of my townhouses I purchased with 20% down. My mortgage on that property ended up being around $1600/month.
I was able to fetch $1750/month for the property.

So, yes, I am "cash flow positive", but barely. $150/month in positive cash flow is nothing.

But it is still a good investment.

I would be less concerned with how much cash flow over the cost of your mortgage you are netting and I would be more concerned with the ability to maintain and secure good tenants.

Someone could have great cash flow, but if they are unable to find tenants (or unable to find suitable ones) and find themselves in situation where the rentable spaces are vacant or destroyed... Well... That's a lot more damaging than having a stable, well-run property that's got minimal or zero cash flow.

In the rental game, it is less about how much you can squeeze and more about doing it with ease. Peace of mind should be of the utmost importance. Don't worry about sucking every dollar you can.


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## Spudd (Oct 11, 2011)

I would say it's more of a lifestyle choice. Do you want to be a landlord? Do you want a second home in the country? Do you mind sharing walls with people while you're there?

I don't think it's a particularly good or bad investment, sounds like it would basically be a break-even. So it's really down to whether all those factors are things you want or don't want. (Personally, I would rather just rent the $900 unit from the current owner than get the albatross around my neck of owning the whole triplex, but that's me.)


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## Mukhang pera (Feb 26, 2016)

KaeJS said:


> ...
> To give you an example, one of my townhouses I purchased with 20% down. My mortgage on that property ended up being around $1600/month.
> I was able to fetch $1750/month for the property.
> 
> ...


My guess is it's actually cash flow negative, unless you pay no insurance, property tax, strata fees, maintenance, etc.

Some here would call it a terrible, non-investment and you should get out. I won't go that far, but it sounds like it might take years to be worth much in terms of a rental. On the other hand, maybe it will prove a winner in the capital gains department.


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## KaeJS (Sep 28, 2010)

Mukhang pera said:


> My guess is it's actually cash flow negative, unless you pay no insurance, property tax, strata fees, maintenance, etc.
> 
> Some here would call it a terrible, non-investment and you should get out. I won't go that far, but it sounds like it might take years to be worth much in terms of a rental. On the other hand, maybe it will prove a winner in the capital gains department.


Not my first rodeo, I have included all expenses.

And I am in the city, so the property has already gone up quite considerably in value.

I find it hard to believe that anyone can say real estate is a non-investmemt in Canada. That is a pretty bold claim.

To make it clear, I'm not attacking you or trying to sound triumphant. Just saying. =)

But you would be correct because I did specifically say "mortgage" and not "all expenses" which was my fault on communication.


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## Mukhang pera (Feb 26, 2016)

Bobcajun said:


> ...
> I am not a professional landlord and I think I would be happy just covering my mortgage. I know that people on this forum have many different and interesting ways of looking at things like this and I would appreciate any comment.
> thanks bob


I think you know what JAG will say about this when he sees it. He will think it's a lunatic idea. 

For me, I tend to be more restrained and I can see why some people do things that are not always the most sensible in simple terms of earnings. There might be intangibles that make it attractive to you and that is fine. However, you mention the property being on a lake, somewhat in the country. Do you have reasonable assurance that it's a good year round rental prospect? Or are you likely to face winter vacancies, with demand coming in summer?

How is the place heated? Electric, with each suite separately metered? And is it 3 legal suites, or suites created out of a single family home or a legal duplex?


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## Mukhang pera (Feb 26, 2016)

KaeJS said:


> Not my first rodeo, I have included all expenses.
> 
> And I am in the city, so the property has already gone up quite considerably in value.
> 
> ...


Well, that certainly casts a very different light on it. There is a prodigious difference between mortgage expense of $1,600 a month and $1,600 a month covering mortgage, taxes, insurance, maintenance, etc. 

And I did not say that RE is a non-investment in Canada. I said that you will find some on this board who would consider a property with a marginal to negative cash flow as a non-investment. Probably our wealthiest member here, by a fair distance, would be JAG, who on many occasions has spoken, as he did here:

_I’m pointing out that sitting on a 400k property that doesn’t generate cash flow is a bad investment. He’s sitting on a ton of dead equity earning a negative return. My examples aren’t extreme by any means, it’s just that I’m actively looking while people like you sit around not having learned from Aesop’s fable about sour grapes._

And here:

_Investment isn't "buy and pray it goes up in value", that's called gambling. Investing is buy at a rate where you can make money off of it. There are many ways you can do that in real estate, for example buying, renovating, selling for more (aka flipping). You add value, and sell for a profit. 

Another method is to buy and rent it for a positive cash flow. 

If the math doesn't work for these, or other methods, then it's not investing. Counting on the market to go up, because it always goes up, is stupid. It's pure gambling. Saying a correction will never happen is just lying to yourself. Don't believe me, go back to Alberta two years ago and see what was being said._

The foregoing are the words of a RE guru who probably owns more RE than all the others on CMF combined.


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## Mukhang pera (Feb 26, 2016)

I should also add that there's no shortage of soi-disant experts predicting the end for Canadian real estate (or plug in the name of any country you like). If they are right, of course it's still an "investment", just one on which any investor will get clobbered. Here's one of dozens of examples to be found on YouTube right now:


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## Just a Guy (Mar 27, 2012)

Actually muk, you are wrong.
on initial read, this isn’t the worst deal I’ve ever read on here. 3 units for 550k isn’t the best investment I’ve seen, but it’s far from the worst generating most of the costs while allowing you to benefit from it has appeal. It makes owning a lake front affordable which is smart. It’s not like buying a rental in gta for 550k and only making 3400/month Thinking it’s a great investment...

that being said, recreational properties values fluctuate a lot with the economy. They drop a lot when people are broke, but gain a ton when people have money. They are much harder to sell than a city property, and rents also swing a lot due to demand and the economy.


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## KaeJS (Sep 28, 2010)

I don't understand the dead equity part?

How is it dead equity if that equity is generating a monthly return? Even if that return only paid the mortgage, it is still generating something...


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## Just a Guy (Mar 27, 2012)

Dead equity is the paid off portion of the mortgage, it just sits there as a guarantee for the bank. It’s not earning you anything.


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## Mukhang pera (Feb 26, 2016)

Just a Guy said:


> Actually muk, you are wrong.
> on initial read, this isn’t the worst deal I’ve ever read on here. 3 units for 550k isn’t the best investment I’ve seen,
> ...


I was not referring to the lakefront deal. I was referring to the other poster's property that was renting for $1,750 a month, with not-too-well-defined expenses of $1,600 per month. I doubt you'd call that a keeper.


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## Just a Guy (Mar 27, 2012)

I was referring to how you implied I’d react to this deal.


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## KaeJS (Sep 28, 2010)

Just a Guy said:


> Dead equity is the paid off portion of the mortgage, it just sits there as a guarantee for the bank. It’s not earning you anything.


I understand what you're saying, but I don't agree. It's not necessarily dead equity. It's equity that you wouldn't even have if you weren't getting paid.

The only reason you HAVE the equity is because you're being paid (other than your downpayment).

That's like saying having your money in a dividend stock is "dead money". Well, not really. There is always a potential higher return somewhere, but if you want the dividend and potential for that stock... You need to put up capital.

Dead equity is when you own your home and your mortgage is paid off and you live in it.

That's dead equity. Because your alternative is to re-mortgage and invest that money. If you are buying an investment property, I can hardly call that "dead equity".

It may not be the best use of funds, but it is not "dead".


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## Mukhang pera (Feb 26, 2016)

Just a Guy said:


> I was referring to how you implied I’d react to this deal.


Oh, okay. But have you not just about always, if not always, advised against any deal where the rent does no more than cover mortgage costs, which the OP suggested would be satisfactory to him? The deal also suggests there would be a sharing of the home with tenants which, if I am not mistaken, you have always regarded was unwise.


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## KaeJS (Sep 28, 2010)

Mukhang pera said:


> I was not referring to the lakefront deal. I was referring to the other poster's property that was renting for $1,750 a month, with not-too-well-defined expenses of $1,600 per month. I doubt you'd call that a keeper.


The mortgage on its own is $1300. There are $300 in other expenses bringing the total per month to $1600.

The house has gone up almost 20% since owning, so it has worked in my favour. But I do understand that when I purchased the home, it was a "gamble" and I "didn't know" it would rise by ~20%.

However, I am definitely someone who believes the market within a 1 hour radius of Toronto is going to die, and my property falls into that radius. The way I see it, I've got a 20% safety net now, so keep the rent payments coming....


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## Just a Guy (Mar 27, 2012)

Kaejs,

it’s dead until it starts making you money. The dividend came from the invested money, once you get it, it just sits there until you invest it. It’s not doing anything.

its similar to kiyosaki’s definition of an asset and a liability. An asset is something that puts money in your pocket a liability is something that takes money out. Thus, your house, tends to be a liability until you sell it.


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## KaeJS (Sep 28, 2010)

Just a Guy said:


> Kaejs,
> 
> it’s dead until it starts making you money. The dividend came from the invested money, once you get it, it just sits there until you invest it. It’s not doing anything.
> 
> its similar to kiyosaki’s definition of an asset and a liability. An asset is something that puts money in your pocket a liability is something that takes money out. Thus, your house, tends to be a liability until you sell it.


Yes, you are right.

But at the same time. You wouldn't even have that equity without the investment.

To say it is "dead" is not necessarily true.
Yes, it is "dead" in the fact it isn't being reinvested. But that's a small price to pay for actually getting that extra rental income.

Money is "dead" when someone can't DRIP a full share, either. But I hardly doubt people call that "dead money".

At some point, equity can be tapped (refinancing, etc).

I'm not trying to argue with you. I know you're a smart guy. I haven't forgotten over all these years.

But to say it is dead... Meh.
Maybe it's not dead money. Maybe it's just lethargic and taking a nap


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## Just a Guy (Mar 27, 2012)

Until you refinance, it’s dead. in physics there is potential energy and energy one powers your house the other has the potential to power your house, but is doing nothing.

you may not agree, and that’s fine, but then again are you maximizing your investments? I had a large stock portfolio for years...then I margined the account. Now for every dollar I had in the account it earns as if it were two dollars. The people who don’t margin their account don’t earn as much as I do. Why, because they don’t see it the same way.

As Kevin O’Leary would say, he wants to send his dollars out to make more dollars, sitting on them does nothing.

I believe it’s these little differences in thinking that separate the very successful from the less successful.


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## KaeJS (Sep 28, 2010)

Well, I'm a big proponent of using margin. I think anyone on here who remembers me would remember that.

But I also am someone who does like to diversify, as well. I clearly see and understand what you are saying. The reality is that it may be worth it to have the dead equity, as you say. Truth is, we don't know how real estate or a different asset would perform. It is very likely (imo) that real estate will continue to do well.

In fact, if we are talking about margin... Real estate is one of the most leveraged investments. So, having the dead equity may actually prove to be more fruitful than avoiding all investments that end up in dead equity for the sole purpose of dead equity.

I don't like real estate.
It is not my favourite.
I'm a stock guy.

But, I also believe in diversification and I can't ignore the long term growth potential of real estate. I don't see my equity as dead.


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## Just a Guy (Mar 27, 2012)

I use the equity in real estate all the time. I buy the property outright, then mortgage it 100% and use the money to buy more properties...no dead equity, just a lot of OPM. Eventually they do develop equity but I can lever that to buy more properties....

as I have no intention to sell, equity is useless to me, I worry about the cash flow.


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## KaeJS (Sep 28, 2010)

Just a Guy said:


> I use the equity in real estate all the time. I buy the property outright, then mortgage it 100% and use the money to buy more properties...no dead equity, just a lot of OPM. Eventually they do develop equity but I can lever that to buy more properties....
> 
> as I have no intention to sell, equity is useless to me, I worry about the cash flow.


Very smart.

Some of us (myself) don't have the luxury of buying outright. But I would do it the same way if I could.


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## james4beach (Nov 15, 2012)

Just a Guy said:


> I use the equity in real estate all the time. I buy the property outright, then mortgage it 100% and use the money to buy more properties...no dead equity, just a lot of OPM. Eventually they do develop equity but I can lever that to buy more properties....


Makes me wonder how leveraged you are, overall.

That sounds very dangerous. What are you going to do if there's a broad decline in real estate which reduces the value of all of your properties?


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## Just a Guy (Mar 27, 2012)

The properties are bought with at least 20% equity built in to their purchase. No bank will lend you 100% mortgage. so here is a scenario. I find a property for 50k and buy it outright for cash ( clear title). I then go to the bank and refinance the property... they send out an appraiser who says the property is worth 65k and offer me an 80% LTV mortgage of 65k- 20% or 52k. The property is technically mortgaged at 80% equity (conventional mortgage, no cmhc) and I don’t need any down payment and get 52k put back in my account. so the property is 100% financed based on the purchase price.
as for risk, as long as I make my payments, the banks are very happy. The market would have to drop more than 20% for them to even begin to worry about the equity of my properties and again, I’d have to miss payments which I’ve never done. Over half of every mortgage payment goes towards principle paydown as well with these interest rates. If the market were to drop, say 30%, who do you think the bank would be more nervous of a place with 95% LTV or 80%LTV which has an income directly related to the property? The banks and I both sleep easy with the stuff I buy.

it also doesnt hurt that real estate is only one part of my net worth, my businesses and stocks are each worth about as much as my real estate. I’m really diversified, not pretending to be by holding just a portfolio of stocks.


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## Money172375 (Jun 29, 2018)

Just a Guy said:


> The properties are bought with at least 20% equity built in to their purchase. No bank will lend you 100% mortgage. so here is a scenario. I find a property for 50k and buy it outright for cash ( clear title). I then go to the bank and refinance the property... they send out an appraiser who says the property is worth 65k and offer me an 80% LTV mortgage of 65k- 20% or 52k. The property is technically mortgaged at 80% equity (conventional mortgage, no cmhc) and I don’t need any down payment and get 52k put back in my account. so the property is 100% financed based on the purchase price.
> as for risk, as long as I make my payments, the banks are very happy. The market would have to drop more than 20% for them to even begin to worry about the equity of my properties and again, I’d have to miss payments which I’ve never done. Over half of every mortgage payment goes towards principle paydown as well with these interest rates. If the market were to drop, say 30%, who do you think the bank would be more nervous of a place with 95% LTV or 80%LTV which has an income directly related to the property? The banks and I both sleep easy with the stuff I buy.
> 
> it also doesnt hurt that real estate is only one part of my net worth, my businesses and stocks are each worth about as much as my real estate. I’m really diversified, not pretending to be by holding just a portfolio of stocks.


Sounds like you have an appraiser “on the inside”. Or a broker who has an inside appraiser. Very rare for appraised value to be higher than purchase price, especially since they can find out the purchase price without you telling them.

does this happen often?


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## Just a Guy (Mar 27, 2012)

If you get an appraisal at time of purchas, the purchase prices is the major determinant (I’ve found all appraisals to come in +/- 10k of the offered price no matter what) however, if you have a clear title, they send out an appraiser to look at comparable properties. As many people point out on this board, finding a property for 45-50k is rare in this market, and higher prices are the norm. So I’ve managed to do this for all my properties because I work and negotiate to get the great deals.

if I were to purchase subject to financing, this would never work, but I can literally go into the bank the day after purchase and refinance a clear title and it works fine...it’s a banking loophole.


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## peterk (May 16, 2010)

Money172375 said:


> Sounds like you have an appraiser “on the inside”. Or a broker who has an inside appraiser. Very rare for appraised value to be higher than purchase price, *especially since they can find out the purchase price without you telling them.*
> 
> does this happen often?





Just a Guy said:


> If you get an appraisal at time of purchas, the purchase prices is the major determinant (I’ve found all appraisals to come in +/- 10k of the offered price no matter what) *however, if you have a clear title, they send out an appraiser to look at comparable properties.*
> 
> if I were to purchase subject to financing, this would never work, but I can literally go into the bank the day after purchase and refinance a clear title and it works fine...*it’s a banking loophole.*


About the bolded - Does the bank/ bank's appraiser _actually_ not go get the purchase price looked up that you just recently paid (in cash) if you are un-mortgaged? And they _only _look at real estate comps in this scenario? How do you know that is what's happening JAG, if you don't mind my asking? Do you get to communicate with the bank's appraiser? Do you feel this is a robust loophole across the banking sector, or something that you need to seek out from a select few banks?

Finding a property, especially cheap condos, that's 20% under market doesn't sound out of this world at all if you're patient (maybe not 50% though, as in your previous examples that rile people up so much, lol), think divorces, or families upgrading and they have to sell the condo really fast or they lose their new home purchase, or condos that need a bit of work (the BRRRR method I think it's called?)

But really you're saying the "trick" is that re-financing a place that you've already financed (at 80%) is harder because you need to go out of your way to prove the market value of the property above what you paid. But if you buy with cash then the bank (for some reason) won't consider your purchase price as the market value, but assess it themselves.


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

peterk said:


> About the bolded - Does the bank/ bank's appraiser _actually_ not go get the purchase price looked up that you just recently paid (in cash) if you are un-mortgaged? And they _only _look at real estate comps in this scenario? How do you know that is what's happening JAG, if you don't mind my asking? Do you get to communicate with the bank's appraiser? Do you feel this is a robust loophole across the banking sector, or something that you need to seek out from a select few banks?
> 
> Finding a property, especially cheap condos, that's 20% under market doesn't sound out of this world at all if you're patient (maybe not 50% though, as in your previous examples that rile people up so much, lol), think divorces, or families upgrading and they have to sell the condo really fast or they lose their new home purchase, or condos that need a bit of work (the BRRRR method I think it's called?)
> 
> But really you're saying the "trick" is that re-financing a place that you've already financed (at 80%) is harder because you need to go out of your way to prove the market value of the property above what you paid. But if you buy with cash then the bank (for some reason) won't consider your purchase price as the market value, but assess it themselves.


Being in the banking sector and RE investor myself, what JAG is stating is accurate. Its not a loophole, its just reality.
Buy outright, and re-appraise. Yes, the appraiser and lender can clearly see the purchase price, but if you buy below the sector value, appraiser has no choice to provide a fair value. On a purchase and even by paying below fair market value, the appraiser will simply stop at your purchase and not force himself any further. On a refinance, they can‘t simply stop at your purchase price if the neighbours are selling higher.


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## Money172375 (Jun 29, 2018)

I’ve actually had the opposite happen. Client says its worth X......appraiser comes back and says ....”but you paid less than that week......I guess it’s worth what you paid”. I wouldn’t count on JAG’s history as a certainty. actually as I remember it, it was the credit adjudication centre that would find the info and override the appraiser In my cases.


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## Just a Guy (Mar 27, 2012)

One of the factors which separates the good investors from the great investors is great investors take the time to learn the systems of the people around them (like the banks) and then use those systems to their advantage. There are many ways to increase the value of your property, for example a good lease agreement can be a huge factor in the appraisal...a property renting for $850/month is worth upwards of 85k just based on the rental income. New paint can significantly increase the value, etc.

nothing is 100%, I’ve had some bad appraisals but, on average I’d say this works more than 95% of the time in my experience.


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## peterk (May 16, 2010)

So the exact same property, if it's sitting there empty, will appraise for a bit more if you wait the 1-2 months to get a tenant in place and you can produce a lease and show your occupied property to the appraiser?

Really this doesn't sound all that hard with these three factors (buy well at a slight discount with all cash, do minor sensible repairs/upgrades, get it rented out) to get a ~100%+ re-finance on your purchase price, or at least 90%. You just need to front the cash at the get go for several months.


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## Just a Guy (Mar 27, 2012)

It doesn’t have to be several months, but I’m sure it would help in most cases, but I’ve done it within a few days of purchase...granted, I tend to rent my places quickly.


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