The Passive Income Myth

“Beware of little expenses. A small leak will sink a great ship.”  Passive Income Benjamin Franklin

Looking back at our early years as real estate investors, it’s astonishing how much money we paid that we shouldn’t have; how much income we should have made but didn’t; and how many problems we could have extinguished when there was smoke, instead of when the fire had consumed a large portion of our profits.

Our belief in passive income had us believing that we could work hard to buy a property, hire property managers and then kick back and let the money roll in. It only took a couple of years before this strategy blew up in our faces with terrible tenants, property managers robbing from us and even being charged with fire code violations. Then it took several more years to right the ship, but once we did it made a big difference. I’ve talked about my belief that passive income is a myth many times … today I want to talk about what you can do about.

First, let me give you one big example of how active involvement – even when you have property management in place – can save you thousands of dollars.

Every month Dave does a review of the expense and income statements for each of our properties. Because he does this every month, anomalies are easier for him to spot. In this one property, Dave noticed the water bill was double what it usually was.

He immediately contacted our property manager and asked that it be checked out. The property manager said it was because the billing frequency had decreased. We were now being billed fewer times, so it was expected that our bills would be double when we were billed.

Because we owned properties in four different cities at that time, Dave wasn’t sure if that was the case, but he seemed to remember that change had occurred over a year ago. He pulled up our property expense tracking spreadsheet – and sure enough – we’d moved to bi-monthly billing over a year ago.

He called our property manager back and insisted that he investigate.

Turns out we had a water leak. The leak was quickly fixed and the next water bill was back to normal. This home is a split level with a one-bedroom basement suite, and because the tenants aren’t on separate water meters we pay those bills. Dave’s swift action saved us hundreds of dollars that year, not just from wasted water but also because he minimized the damage to the home by catching the leak sooner!

It wouldn’t take too many little leaks like this to completely remove all the cash flow from this property.

So besides just monitoring the water bills … what else should you watch for with your rental property?

Rent payments: If you’re managing the property yourself, you’ll typically notice when you haven’t been paid; but when you have a property manager handling your rent collection, you might forget about it. You also might assume your property manager will let you know if rent has not been paid, but that is not always the case. Stay on it. If the rent wasn’t paid, find out why and what’s been done to address the matter. Never assume things are being handled. In every case, a non-payment-of-rent notice (or the equivalent type of notice for your state or province) should be issued, in case you eventually have to take steps to evict the tenant.

Utility bills: Whether you pay the utilities or not, you should keep an eye on the bills because increased utilities could indicate other issues, as in the case of the water leak. It could also indicate a broken seal on a window or a door if your heating or cooling costs have gone up … or just inconsiderate energy usage. When our tenants usage of electricity goes up more than 25%, we always let them know and remind them to turn lights off, turn the heat down, turn off the TV when not in use, and so on. It’s not just better for our bottom line; it’s better for the environment.

Repairs and maintenance: Your property managers should be getting three quotes for any major work. If it’s going to cost you more than $500 to do something, you need options. And you need to insist on this.

You also need to monitor what is going on. Unfortunately, we have many examples of where our property managers have mismanaged repairs and maintenance, not gotten more than one quote, or allowed the repair budget to go well over what was agreed upon. Even with diligent management, we still have these issues on a regular basis; and sometimes we don’t have enough time to deal with it ourselves so we spend money that we could have saved.

So listen to the warnings of Ben Franklin and watch out for those small “leaks.” Spend a few hours every month reviewing your monthly expenses and cash flow. Ideally, enter them into a tracking program or a spreadsheet so the discrepancies are easy to spot.

So what about financial freedom and buying enough property so you never have to worry about money again?

Let’s say you do the math … you figure out that if you own 30 properties that make you $300/month positive income, you will be able to quit your job. And if you can quit your job, you will have financial freedom! Finally!

What a romantic load of crap that is!

What is financial freedom? Most people try to convince me that it’s never worrying about money again. If that is financial freedom, you aren’t going to get there with real estate. “More properties” does not equal more freedom … more properties equals more roofs that leak, more appliances that break, more hot water tanks that flood, and a whole lot more tenants to deal with. Even if you have the best team, these things will still require your attention – and I assure you that it will be during the week when you’re trying to finally relax that you will have a tenant move out on short notice – leaving you with a property to fix up, a hot water tank split open, and a plumber that seems to have vanished off the face of the earth. And things don’t space themselves out nicely – they all happen at once. The expression “When it rains it pours” was not created because of the weather!

Let’s be clear on one thing: “Financial freedom” is bogus. It doesn’t really mean anything. It’s a fluffy phrase that sounds wonderful but doesn’t translate into any kind of reality.

And real estate is not the way to go if you never want to worry about money again. More properties is just that … more properties.

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More Than Cashflow BookLike this article? You’ll LOVE More Than Cashflow: The Real Risks & Rewards of Profitable Real Estate Investing. This is just a tiny excerpt from the Amazon #1 Best Selling Book.

“Finally, an honest, real-life guide to Real Estate Investing! There are many Real Estate books available that talk about one aspect of real estate investing or another, but very few are as honest and concise as ‘More Than Cashflow’. I have a small library of Real Estate books and this one will definitely be the first on my list of recommended books to read.” ~ From Rick on Amazon.ca

 First Image Credit: © Photographerlondon | Dreamstime.com

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And from the Rev N You Video Archives … some additional tips to help you make more money when you’re working with a property manager:

How to Choose Your Real Estate Investment Market: Two Factors Nobody Talks About

Choosing a Real Estate Investment MarketOne of the biggest stumbling blocks for real estate investors (new and experienced) is where to invest. What market will be the ideal location for the next investment property purchase?

At one point in our business we owned property in six different cities across Canada. We had property in Ontario and in BC. It sounded cool to say that we owned property in so many different cities, but the reality was less than impressive as we were forced to rely on our teams very heavily. Traveling to solve problems or hire new team members was expensive and time consuming.

Real estate was supposed to create freedom and wealth for us, not cost us a fortune, stress us out and suck up all our time.

That’s why picking your market is a CRITICAL step in the process of becoming a real estate investor. But, because I am coming at this from a perspective of doing real estate deals that make sense for the life you want to live not just financial sense, this video contains two factors nobody else really talks about when it comes to choosing your real estate investment market.

I’m not suggesting you invest in towns that are shrinking nor am I saying that you have to find a $1.2 million dollar Vancouver house that will cashflow (it’s kind of hard to do that…). I am just giving you a few additional factors to think about that are more important than economic fundamentals when it comes to thinking about YOU, your family, and your goals as you build your real estate investment empire.

You might also be interested in these real estate investing articles:

>> How to Find a Great Real Estate Investment Deals

>> How to Double Your Money with Real Estate every Year

>>Housing Bubble? Housing Slump? Housing Recovery? How to Tell


Fear Factor: 4 Steps for Overcoming Fear in Real Estate Investing

Fear of Real Estate InvestingI’ve been in real estate for over 11 years and done dozens and dozens of deals, but time and experience doesn’t totally get rid of my fears. How I look at my fear is different but I think I will always be scared that people won’t like what I have to say. I’m sure I will always worry a little bit that something could go wrong with a deal. But those fears serve an important purpose in my life – they always make me stop and double check what I am saying and doing in my business. The key is that it doesn’t freeze me in place – it just serves as a good double check.

Fear is an emotional response to perceived dangers. Trying to ignore or suppress fear doesn’t work. I also don’t think you should try. It’s our ability to recognize potential danger so we can choose whether to confront it or run away.

Fear in real estate investing is common. It can be scary at times. There’s a big fear of losing money. There’s concern over the stress that you can feel if something goes wrong with a tenant or a partner or a deal.

Running from what scares you, doesn’t work though. Doing nothing doesn’t change anything either.

I think the best thing you can do is acknowledge you’re afraid of something, understand it, and then decide if you need to run from it or confront it. When you do it this way you’ll be able to recognize the fear that is protecting you and move past the fear that is holding you back for no reason. Specifically, here’s how I overcome my fears and how you can too:When you do it this way you’ll be able to recognize the fear that is protecting you and move past the fear that is holding you back for no reason. Specifically, here’s how I overcome my fears and how you can too:

1. What are you really afraid of?

I’ve met hundreds of investors that are stuck – they want to do deals but aren’t. Sometimes they have been stuck for years and years!

When I ask what’s holding them back the answer is almost always because they can’t find good deals in their area or they don’t think their market is a good one to invest in, but they don’t know where else to invest. Sometimes they don’t have investment capital and feel stuck without money to put into the deals.

It’s possible these issues are actually the issue, and in hot real estate markets with bidding wars and limited supply, lack of good deals is quite possibly true. However, in most phases of the real estate cycle, there are always plenty of deals out there for investors willing to work hard to find and create them. And there is definitely money.

Rarely are these actually the obstacles holding you back. More likely, it’s something deeper like a fear of making a mistake that leads to you being judged poorly by someone you love. In other words, you’re likely not just afraid you will do a bad deal and lose money. You’re afraid that if you do a bad deal and your Dad finds out he’ll say “I told real estate was a bad idea – now quit trying to make money in real estate and get a real job like I taught you.”

You have to look at WHY you’re afraid of losing money. What is it that you are really afraid of?

Until you get into it and actually uncover that real fear, it’s hard to move past it. But once you realize that you are afraid your husband or wife will think less of you if you do a deal that doesn’t make money, you have something you can tangibly deal with.

2. Get Comfortable with that Fear

Again, I am not a big believer that you’re going to get rid of the fear so the better plan is to acknowledge it’s there, figure out what is driving it, and then do what you need to do to feel more comfortable with it’s presence.

Let’s just say you’re biggest fear is that your husband or wife will be upset with you for a deal that isn’t that good. What can you do to get more comfortable with that fear? My suggestion would be to sit down and have an open conversation with your spouse.

Listen honey – you know I’ve been wanting to get into real estate for awhile. I really believe it’s the best way for me to ensure we’re all taken care of in our retirement and to hopefully have some additional money to pay for our kids to go through University if they want to do that. I just feel a bit stuck. I’ve done my homework. I have taken some courses and done lots of reading as you know, but I am not able to move forward. I think it’s because I am really scared that if I make a mistake it will change how you feel about me.”

Maybe that’s not a conversation you’d normally have but if you’re married it’s probably time you opened up and started to talk openly about your fears around your investments. What you’ll probably find out is that your spouse appreciates your concern but supports you. He may even offer support, suggestions or other ideas to help you achieve your goals.

It’s unlikely you’ll erase the fear but now you’ll feel more comfortable to move forward.

If your fear doesn’t involve a desire to be liked or a fear of being judged then a conversation might not solve it. If, instead, you’re lacking confidence in yourself and feeling terrified you’ll pick an awful tenant you still have to get comfortable with it. My suggestion? Think about the absolute worst thing that can happen to you if you pick the world’s worst tenant. Now, think about what you will do to resolve it. In most scenarios I can think of, it’s a pain in the ass to deal with but insurance will cover me or I have to spend several thousand dollars handling the issue. I can almost always come up with half a dozen ways to find the money to pay for that kind of damage and I am sure you can too if you really think about it. After you’ve done that, you have to remember that your absolute worst case scenario is very unlikely to ever happen but if it does, are you going to survive it?

3. Plan For Success

When my husband Dave and I are preparing to present an investment opportunity to one of our money partners we always plan for them to say yes. We prepare and practice what we’re going to say so that we can deliver the message clearly, concisely and with confidence. Sometimes they say no. Once in awhile we turn them away because we don’t want to work with them. Usually they say yes because we’re ready for it.

You might feel like there is no point lining up your mortgage broker, lawyer and property manager until you’ve found a good deal. The reality is that you’ll probably never find a good deal until you’ve planned for your success. Your own self doubts are holding you back from doing what you’re going to need to do once you find that great property. And you know what? Once you are ready for that deal it will probably be right there under your nose!

4. When All Else Fails, Take Action

There’s almost no fear that can’t be overcome by simply taking action that moves you squarely towards what you’re afraid of. If you’re afraid of rejection from a potential money partner, nothing else will help you truly become more comfortable with that fear than sitting across from someone and risking that NO.

The objective here is not to eradicate fear. Fear is important. The day you stop fearing you could make a mistake is almost always the day you screw up big time. Fear will keep you checking in to make sure you’re taking precautions. Let fear do it’s job to keep you safe but do not let it anchor you.

Get to know it so you can recognize when it’s protecting you from something real versus scaring you from becoming as great as you can be. Once you feel better that it’s a fear of something that won’t kill you or damage your life forever, you can move forward to planning and taking action.

Want more articles on this subject?

>> How to Use Fear to Your Advantage in Real Estate Investing

>> Goal Setting For Real Estate Investors


Image Credit: © Francesco83 | Dreamstime.com

What to Do When Your House Isn’t Selling A Guide for Real Estate Investors

What to Do When Your House Isn’t Selling

When your house isn't sellingKevin O’Leary is a money focused investor. He’s entertaining, obnoxious and single minded in his investment strategies on Shark Tank and Dragons Den. Or, at least the character he seems to play is all those things.
He acknowledged in a recent episode of Dragons Den that he considers his dollars to be soldiers. He sends them out to battle ONLY in the highest likelihood they will win and return with more soldiers. As in any battle, it’s inevitable that a few will die, but he wants to kill as few as possible. That’s murder in his mind.
Maybe he’s a little too single minded in my view but his point is clear for all investors: focus on the end when you start. What’s the likelihood that you’ll get your money back with a return at the end?
What could happen that could cause your soldiers to die at war?
As a real estate investor, one such tragedy could be a situation where you have to sell but your property is not moving. Or maybe it just won’t sell at the price you need it to sell at.
Prevention is the best remedy for this situation:

You are making an investment only if there is a reasonable probability that you will be able to make money when you sell. Buy every property with that in mind.

How to Exit Your Real Estate Deal When Selling Doesn’t Work

But, if it’s too late for prevention here are three other exit strategies to consider if selling doesn’t work for you:
1.    Rent to own
2.    Partner with someone who will take over the deal – you can structure this however you want. Some people sell off 50% of the equity to an investment partner while others might find someone to take over active management in exchange for 50% of the cash flow.
3.    Sell it unconventionally offering an investor the opportunity to do a wrap mortgage, a sandwich lease or with you carrying a VTB for a term.
The rent to own strategy is just like how it sounds, a tenant rents your property with the intention (and option) to buy the property at some point in the future (and at a pre-determined price).
To help your tenant prepare for the purchase you charge them a deposit today and a rental rate over and above the market rate with a portion of their rent building up as a rent credit. You set the sale price today that they have the option to buy the house at in a year or two.

As an exit strategy, rent to own has a few advantages including the opportunity to help someone become a home owner that might not be able to make it happen without some support right now. It also is a way to sell a property without using a realtor (saving commission) while making higher than usual cash flow each month thanks to lower maintenance costs and higher rent. The drawbacks are that you can’t exit the deal completely for a year or two (or longer depending on your term) and there is always a chance the tenant you put in the property does not buy. Here’s a quick rent to own example to show you how it works for you and your tenant. Let’s say a typical single family home (3 beds, 2 baths, 2 storeys, good neighbourhood) in your market rents for approx. $1,300 per month as a standard rental unit. In a RTO, the tenant may pay $1,700 per month and $400 of that $1,700 goes towards the purchase of the property (when and if they buy).Thus, if the renter (known as a Tenant-Buyer) elects to purchase the property after 1 year, they will have $4,800 ($400 times 12 months) towards the purchase of the property. This, coupled with an Option Fee (similar to a down payment) which the Tenant-Buyer (TB) pays to the Landlord at the beginning of the rental period, goes towards the purchase price.

Here’s a quick look:

 Purchase Price for Tenant-Buyer:
 Option Fee from the TB:
 Monthly Rental Credits from the TB:
 Net Cost to TB when they Purchase:
In essence, the TB no longer has to come up with $350,000 when they buy the property, they now have to come up with only $335,200 (plus standard closing costs). And, if the Tenant-Buyer is able to obtain good financing, they may only need to put down a few more thousand to make-up the difference between the purchase price and the mortgage amount. This effectively helps the Tenant-Buyer to get into a home and start building equity right away (it’s like forced savings) instead of having to put aside $500, $600, $700 per month into a crappy (low interest) savings account. And, it allows you to exit from a property that you’re having trouble selling.
Partner with Someone
If you have a great cash flowing property and your reason for exit is simply to pull funds out of the deal, finding a partner to buy 50% of the equity in the property might be the solution.
This type of partnership can be done with Rent to Own’s, a regular Buy and Hold, on a commercial property, or even on a flip.
For this to work, both sides of the partnership have to have to bring something of value to the table. If you have a positively performing property with good future potential, you could sell half of the deal to a more passive investor and continue to run the property. That would allow you to pull your cash out.
If you are going to approach anyone about taking over 50% of your deal – whether you’re looking for expertise or money – make sure your deal has something of value in it for them.
Sell it unconventionally
There are lots of investors out there looking for a way to get into a deal without a bank or without using a lot of their funds. Usually they are willing to pay a slight premium on a property in exchange for a creative way to purchase the property. Or, at a minimum, it will help you move a property when selling isn’t an option.
Of course, like rent to owns, the creative strategies for sale do mean a delayed exit from the deal, but it can also mean more profits.
Here’s three potential ways to sell creatively:
–       WRAP MORTGAGE which is simply selling the property with existing financing in place and “wrapping” additional financing on top of it. Essentially, the buyer would pay you 1 payment which covers your existing mortgage payment and includes additional funds to go towards a VTB. The buyer does not need to come up with new financing and they can put less money down as you are including a VTB that’s wrapped together with your current financing.
–       A SANDWICH LEASE which is where you sell to an investor on a rent to own and allow them to do a rent to own of their own (that’s what creates the sandwich).
–       VTB– offering to carry financing on the deal. Not only can this help you sell faster, and at a higher price, it can also result in a higher overall return because you’ll earn interest. For example if sale price is $300,000 but there is a two year VTB (for 100% of the price) at 6% interest-only, you’re actually getting $336,000 for the property (after 2 years of mortgage VTB payments).
There are also potential tax savings if the home was not your primary residence of the whereby you can defer some of their capital gains to future years.
The lowest risk VTB for a seller to hold is in a 1st mortgage position, but the challenge with that is you pretty much have to own the place free and clear from any current debt.
The best time to plan your exit is before you even buy. Considering who will be your buyers, what concerns they will have and what kind of supply and demand you’ll be facing for that type of property in the future are pretty important considerations when planning an exit. That, coupled with having multiple exit strategies in mind, will help you to become a more savvy investor and prevent you from buying properties that could hurt your wallet rather than filling it.

Investing in Real Estate vs. Stocks


Investing in Real Estate or StocksIf you have an apple and I have an apple and we exchange these apples, then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.” – George Bernard Shaw

It’s hard not to get swept up in the chaos of the holiday season and forget that sometimes the simplest things are what make an experience special. That’s why we chose to open with the above quote this month. We share our ideas and experiences with you, and many of you have shared yours with us (THANK YOU!). We write Rev N You with Real Estate each month to, at the very least, entertain you for a few minutes, and hopefully help you to invest in real estate.

So…for this article, let’s take a look at what’s better: investing in real estate or investing in stocks? Diving into the math with some examples, we answer which vehicle has the better return on investment.

At the end of the day, your investment portfolio should be diversified. It’s not about holding just real estate or just stocks. But, most of you aren’t satisfied with that answer. You’ve asked for more analysis on which investment vehicle – Stocks or Real Estate – has the better Return on Investment (ROI)?

I won’t get into all of the qualitative reasons why I love real estate investing. If you’ve been reading our newsletter for awhile you know that “kicking the bricks” and having control over the outcomes are two of the main reasons I put more focus on my real estate portfolio that my stock portfolio. For today, I’ll stick to numbers.

Before we go into the numbers, I need to explain a few things. When I refer to real estate, I mean an investment property, not a home. Someone is paying rent. Also, I am going to use B.C. average values over the last 15 years. B.C. prices have surged in the past 5 years, but the 10 years prior to that were far from stellar. So, we are looking at averages.

On the other side, I look at the widely used S&P 500 as the stock average return. It’s often used as an indicator of the broader market and includes both growth companies and value companies along with NASDAQ and NYSE traded companies. And, for simplicity, I am assuming that the investment property garners enough rent to cover your mortgage, taxes, management, insurance and miscellaneous other costs but doesn’t put any extra in your pocket. Thus, it’s a “neutral” cashflow property.

Instead of giving you percentages to work with, I want to show you what your $50,000 investment would look like after 15 years in real estate or 15 years in a balanced portfolio reflective of what has been achieved by the S&P 500. Without getting into the math, $50,000 in real estate will become $358,000 after 15 years (this includes appreciation and principal paydown). This works out to an average annual return of 15.1%.

Conversely, the $50,000 invested in the S&P 500 would become $451,000 after 15 years at an average annual return of 15.8%. And, maybe even more importantly, the equity you have built up in S&P 500 stocks ONLY surpasses your real estate equity during the 11th year.Also note, in the Annual ROI including Principal Paydown column, your Real Estate ROI shrinks over time. But, because you are building so much equity, it would be wise to pull some of that money out and purchase another property to increase your returns again.

But,before you stop reading Rev N You and give up on real estate, remember that the average investor (according to Money Sense, November 2007 issue) only gets about 7% return on investment (BEFORE FEES). Which means that after 15 years your $50,000 would only be $137,000.

With real estate, to maximize your returns (using leverage) pull out equity as it accumulates and buy something else. This makes it a very powerful investment (don’t believe me? take a look again at how we bought eleven properties in five years). Real estate is a much stronger investment because of leverage. Your investment is usually a maximum of 25% of the property value and can be leveraged over time into substantially more equity, a renter is paying down your mortgage, and the value of the property over the long term, almost always goes up.

The story doesn’t end there. And, as I said at the start, it’s not about choosing one over the other every time. It goes back to your goals. And, although real estate is the clear winner in our view (and experience), the choice is up to you to include it in your portfolio. If you buy right (which isn’t that difficult if you do your research, much the same way you need to research when buying stocks or mutual funds), over the long-term you will build up a substantial amount of equity with real estate.

I have included a couple of good articles below which detail some of the pros and cons to both investment vehicles so please check them out. Choosing to own real estate as an investment, or even choosing to own your home can, and should, require some work. It’s not an “easy” game that you can simply jump into. But, if you determine your objectives, do your research, and save some money for your down payment (or find other’s who have it), you can go a long way with your dollar in the real estate sector.

Check out the following articles for a continued battle between real estate and stocks.CNN Money’s Article has a lot to do with why people don’t choose real estate. And as a counter article, you can see Ozzie Jurock’s article here.

Published December 17, 2007

It is Not All in the Numbers When Investing in Real Estate

 Just because the property has good numbers, does not mean it is a good buy


When the numbers on your potential real estate investment look good

After a weekend at the real estate investing course that I paid dearly to attend, I was newly equipped with the mission to find properties with a Gross Rent Multiplier of 7 or less. It took me some searching but I found one with a GRM of 3.47! What a great find, or so I thought.

The numbers:

* Asking price = $150,000
* Monthly rent = $3,600
* $150,000/($3,600 x 12) = 3.47.

What a pleasant surprise when the Vendor was also willing to hold a second position on the property. So, not only was I able to secure the low GRM property, but I was also able to get a vendor take back loan.

The trick was that this property was run down, had problem tenants, and always needed a lot of work. Do you remember the crack house story from a few months ago that put me in court and cost me nearly $25,000 in court ordered work and fines? If you do, then you know about my GRM property of 3.47. To be fair though, it is possible to do well with a property like this. To do so, however, you have to live close to it, have thick skin, and be available 24/7 to maintain it. Or, have a phenomenal property manager that does not cost you an arm and a leg!

When the numbers aren’t as good, but the property has a lot of potential

When you know what your goals are, you can easily identify properties that fit within your goals. We were looking for a property to purchase with potential appreciation, reasonable liquidity and limited hassle. With several other properties causing us grief, we really just wanted a good investment, even if we had to pay more for it relative to the rent we were bringing in.

The numbers:

* Asking price = $275,000
* Monthly rent = $1,575
* $275,000/($1,575 x 12) = 14.55.

The property had a GRM that was over double what the real estate investing course recommended we purchase, however it fit all of our other criteria, and because we used equity from another property to purchase it, we didn’t need any of our own money for the down payment. In the end, it costs us $200/month to keep it, but we have some tax write offs to offset that, and it has been a very low maintenance and stress free purchase so far. It’s also the one that Julie still has yet to see!

Knowing your goals gives you comfort and confidence in your purchases. Also, knowing what you are willing and able to endure financially and emotionally will take you a long way to finding properties that fit into your life.

published July 16, 2006


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