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A Slow, Boring, Incredibly Awesome Strategy for Building Wealth Through Passive Real Estate Investing

by Brandon Turner on August 2, 2014 · 82 comments

  

I want to apologize.

You see, BiggerPockets has a LOT of information. Like, more than you could ever hope to read in your lifetime, and that’s growing every day.  Now, while that seems like a great thing (and it is) it does have a negative: shiny object syndrome.  And I’m part of the problem, with my blog posts, podcast contributions, and forum posts.

Sorry.

But I know the same thing happens to me. I hear a Podcast guest chatting about their strategy for doing this or that and suddenly I’m intrigued and want to do it also. From flipping to wholesaling to turn key rentals to direct mail and more, I just love learning these new strategies. I love the hustle that these real estate investors have and their commitment to building a big business through real estate.

It’s SO exciting, isn’t it?

But what about those strategies that no one talks about? The not-so-exciting ones? The old-fashioned, simple buy and hold real estate for building wealth?

That’s what I want to focus on today: simplicity. What would happen if you just invested in real estate, simply?

Well, let’s find out!

Below I’m going to walk you through a fairly basic strategy for building wealth through real estate using the fictitious example of Howard and Jane Johnson, both 33 years old.  Let’s follow The Johnsons on their journey.

(P.S… Are you on Twitter? Why not click here to Tweet this article and let your followers know about it!)

The Strategy

First, let’s lay out some basic principles of The Johnson’s life, so we can get a base line for getting started.  Perhaps the numbers are different in your area, but don’t use this as an excuse for why “this strategy won’t work for me.”  You don’t know what will work until you start playing with the numbers!  But let’s see how they work out for Howard and Jane, and then you can do the math for your area to see how it looks.

Let me introduce you to Howard and Jane. 

Howard is a high school science teacher, currently making $55,000 per year while his wife Jane works part time selling items on eBay for another $12,000 per year (while working the world’s hardest job- raising 3 beautiful children at home) for a total annual income of $67,000 per year. After taxes, the two clear $4,000 per month in take home pay from both sources of income. They have approximately $25,000 in savings, in a Roth-IRA. They currently own their own home and pay $1,000 per month for their mortgage payment and are able to save roughly $1,000 per month by living below their means.

The Johnsons begin to listen to the BiggerPockets Podcast and realize they need to do more to secure their financial future, rather than simply relying on Howard’s small future pension. They decide real estate investing will become their path to financial freedom.

Howard and Jane decide that they want to own rental properties, but they do not want to manage the properties themselves. They decide to begin with buying nice properties that need a small amount of cleaning to get rent ready, but no major rehabs. They simply want to buy properties and hold onto them to gain an early retirement.

Related: How to Make a Million Dollars from Real Estate: A Step by Step Path

The Beginning:

The Johnsons find their first rental property located a few hours from their home. The property is a side-by-side duplex on the market for $120,000, but because it needs a little bit of work, they offer $110,000 with the seller paying closing costs. They put down 20% on the purchase, (leaving a few thousand left for reserves)  Each unit rents for $800 per month, for a total monthly income of $1600.

The Johnson’s run the numbers through the BiggerPockets Rental Property Calculator and discover the following: (click the image to see the full report.)

Rental Property Calculator from BiggerPockets-2

 

Notice above in the red, the Johnsons can expect to receive around $456 in cash flow each month, after accounting for utilities, property management, repairs, capex, and all other repairs.  The find a great property manager and within a month, they have the place up and running, building cash flow and climbing in value.

Rather than spending the cash flow to live, the Johnsons decide to save all the cash flow and use it to buy the next property…

Year One and Year Two

After 24 months of renting the duplex out (all of year one and all of year two), Howard and Jane have saved up $10,958 from their rental and have now saved another $12000 from their personal savings for a grand total of $22,958.  They are ready to purchase again.

Year Three

Howard and Jane decide to take their finances and make another purchase.  For simplicity sake, let’s assume they buy the exact same deal as before, with the same numbers. (In reality, it could be something different, but it’s the numbers that matter. Perhaps it was a 4 plex, or a single family. Who cares. It’s the math that counts!)

The Johnson’s purchase the second duplex and are now able to save $912 per month in cash flow from the 2 properties and $1000 per month from their jobs, for a total of $1912 per month.  Over the next 12 months they are able to save a total of $22,944 in combined cash flow and savings from their jobs.  At the end of year three, they are ready to purchase again.

Year Four

Again, for simplicity sake, let’s assume they buy the same property again. Why change the formula when it’s working?

The Johnson’s purchase the third duplex and are now able to save $1368 per month in cash flow from the 2 properties and $1000 per month from their jobs, for a total of $2368 per month.  Over the next 12 months they are able to save a total of $28,416 in combined cash flow and savings from their jobs.

Year Five

This time, for the heck of it, let’s say they take a year off and just save all the cash flow they receive and all the savings from their job. Another $28,416 this year as well, leaving them with $56,832 at the end of year five. It’s time to purchase another property. This time, they decide to go a little bigger.

Year Six

At the beginning of year six, thew Johnsons decide to keep $6,832 for reserves and use the $50,000 remaining to purchase a nice four-plex, currently listed at $200,000, a few hours from their home. Each unit will rent for $800 per month.

Using the BiggerPockets Rental Property Calculator, we can estimate that the property will produce approximately $1,034 per month in cash flow (click the picture below to see the full report.)

Screen Shot 2014-08-01 at 12.35.57 PM

 

 

Just to recap:  At the end of of year six, The Johnsons now have 3 duplexes, each producing $456 per month in cash flow, and now a fourplex, producing $1034 per month. They are also still saving $1,000 per month from their personal jobs for a grand total of $3402 per month or $40,824 by the end of the year of year six.

Year Seven

The Johnsons decide to not purchase anything in year seven, but just save more cash. They are able to save another $40,824 to add to the $40,824 they saved during year six.

Year Eight

By the beginning of year eight, they now have $81,648 saved.  And you guessed it, they decide to invest in another property. This time, they decide to purchase another fourplex with the same numbers as earlier AND another duplex with the same numbers as earlier. This requires a little under $75,000 in down payments, leaving them a little extra for reserves.

After the two purchases are made at the beginning of year 8, the Johnsons now have 4 duplexes and two fourplexes, bringing in a total monthly cash flow of $3892. Combine that with the $1,000 per month they are saving from their jobs and the Johnsons now have just over $5,000 per month adding to their savings or $60,000 per year.

Year Nine

At the beginning of year nine, The Johnsons decide to buy one more fourplex, using the same numbers as earlier. They put approximately $50,000 into the deal, leaving them a little extra for more reserves. At this point they now have 4 duplexes and three fourplexes, plus the $1,000 per month for a grand total of $4,926 per month in cash flow. They are still saving $1,000 from their jobs, leaving them $5,926 each month to save, or $71,112 per year.

Year Ten

At the beginning of year nine, The Johnsons decide to buy one more fourplex, using the same numbers as earlier. They put approximately $50,000 into the deal, leaving them a little over $20,000 for more reserves. At this point they now have 4 duplexes and four fourplexes, plus the $1,000 per month for a grand total of $5,960 per month in cash flow. They are still saving $1,000 from their jobs, leaving them $7,160 each month to save, or $84,192 per year.

Now What?

At the end of year ten, The Johnsons take a look at their portfolio and see the following:

  • Total Units: 24
  • Total Monthly Cash Flow: $5960
  • Total Mortgages: $925,689
  • Total Value: (assuming no appreciation) $1,280,000
  • Total Equity (assuming NO appreciation or decline or loan pay off) $354,311

At this point they have a decision to make: should we keep moving forward with this same strategy, or work to pay off the loans?

The Johnsons decide to start paying off the properties, using the “Debt Snowball” method advocated by financial expert Dave Ramsey. This means they will make the minimum payments on all their loans except the smallest balance, and throw everything they can at it until it’s paid off. Then they’ll use the extra money to pay off the next smallest debt and the next smallest debt, and so on until it’s all paid off.

Also, they decide to stop saving the $1,000 per month from their jobs so Jane can quit her eBay business, but will only use the cash flow to pay off the properties.

While the calculations for this would take some time, luckily Dave Ramsey offers a free-to-use “Debt Snowball Calculator” so we can simply plug in the numbers and see how they work out.  This is how it looks, for Howard and Jane, at the end of year 10:
Screen Shot 2014-08-01 at 1.33.07 PM

When I went through and applied an extra $6000 payment per month toward the first debt, followed by the next, followed by the next (and so on) I was able to see exactly how long until ALL the debt was paid off:

9 years.

(actually, 8 years, 7 months, but who’s counting!)

Additionally (as pointed out in the comments below from Lucas, because I forgot!) the couple no longer needs to make mortgage payments. They were paying $472 per month for a mortgage on each of the four duplexes and $859 per month for each of the fourplexes. Therefore, at year twenty, the couple would have $5324 MORE each month in positive cash flow, bringing their total monthly cash flow to $11,284 per month or $135,408 per year (again, assuming no increase in rent over those twenty years!)

Year 20

We started this journey with Howard and Jane when they were just 33 years old. Now, 20 years after starting their journey, they own all their rental properties free and clear.  Assuming NO appreciation, whatsoever, the Johnsons now own $1,280,000 worth of real estate that produces $11,284 per month in income at 53 years old.  

Now, you may be thinking to yourself “you know, $11,284 per month in income doesn’t seem that great for 20 years of work.”

However, keep a few things in mind:

  • This accounts for ZERO appreciation. We’ll touch on this in a moment.
  • This doesn’t take into account the rise in rents over the years. However, my assumption in this example was that inflation will rise at the same rate as rent, so eliminating both kept things simple.
  • This strategy required just 8 purchases over a 20 year time frame, all with property management in place. This is not a time-intensive process- this is passive!
  • With the “free and clear” properties, The Johnsons could now sell them with seller financing to increase their cash flow significantly.

Related: 100 Ways to Make Money in Real Estate

The Icing on the Cake: Appreciation

I like to look at appreciation as something special that gets added later – like icing on a cake. I never buy a deal hoping appreciation will bail me out, but it doesn’t mean I don’t hope for it. For this reason, I want to look at the numbers, accounting for appreciation. To do this, we’re going to use the BiggerPockets Rental Property Calculator again.  For the calculations, I assumed a 3% average increase in income and a 3% increase in property values, with a 2% increase in expenses (I chose 2% for expenses because the mortgage amount would never increase, so I could do a little less.)

At the bottom of the results page of the calculations, there are some graphs and charts. Using these, I can see that in year twenty, the properties will be worth the following:

  • Duplex 1: $217k
  • Duplex 2: $204k
  • Duplex 3: $198k
  • Duplex 4: $171k
  • Fourplex 1: $200
  • Fourplex 2: $206k
  • Fourplex 3: $218k
  • Fourplex 4: $231k
  • Total:   $1,645,000

In other words, if we are able to achieve a 3%, on average, appreciation over the coming 20 years, The Johnsons could expect to have a net worth of $1,645,000 from their real estate because of the 8 properties they bought years earlier.

Conclusion

This strategy required no direct mail work for The Johnsons.

It required no driving for dollars.

It required no middle of the night phone calls from tenants.

It required no motivated seller phone calls, no house flipping, no “day in day out” dealing with contractors.

This plan was … boring.  

However, the math doesn’t lie.  Sometimes boring can be incredibly sexy, and this strategy demonstrates the incredible power of real estate over the long term.  Wealth can be built through real estate investing on the side if you just make a plan and stick to it. I hope this post has given you a few new insights into how to use real estate to grow your portfolio.  Just remember one final tip: this was all possible because Howard and Jane shopped for a great rental property. They learned how to properly find and analyze an investment deal rather than just buying anything. And that’s the secret to success with real estate: being smarter than the average investor. And that’s what BiggerPockets is here for: to help you become a better investor.

So jump into the community and start networking, talking, debating, asking questions, and analyzing deals. Become the better investor and see your personal wealth grow.

Questions? Comments? Let me know in the comment section below!

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{ 82 comments… read them below or add one }

Mark Ferguson August 2, 2014 at 1:13 pm

Great write up Brandon. I love to make ten years plans like this for my goals and to show others how much you can make from rental properties. I like to increase the results by making more money to buy fix as flipping :).

I did some calculations last night on my 11 rentals. I figure they increased my net worth by over $500,000 since I bought my first in December 2010. Part of that is because I like to get great deals hat take work and part of that is 15% appreciation in my area each of the last two years. I figure I spent about $300,000 to $350,000 buying those properties, but still fun to figure.

I have been lucky with appreciation, but I also new prices were incredibly
Low. Like you said I never calculated these figures before because I think of appreciation as a bonus and focus in cash flow. Plus these are all paper returns and increases.

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Brandon Turner August 2, 2014 at 1:55 pm

Thanks Mark! I know I love to do these plans and see what the future could look like. And nothing wrong with capitalizing on that appreciation – nice work!

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Lucas Peczek August 2, 2014 at 1:24 pm

Great writeup or a simple investment strategy that I’ve been using myself alongside rehabbing and flipping too.

Now correct me if I”m wrong, but you may have underplayed the monthly cash flow at the end of year 20. If the CF at year ten is almost $6k, and the Johnsons started paying off their debits from then on, shouldn’t the saved interest payments be added onto their monthly CF?

Look much more attractive at that stage when the income is probably closer to $12k per month passive, hey?

Love your articles. Keep them coming.

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Brandon Turner August 2, 2014 at 1:57 pm

Hey Lucas, you are absolutely right! The cash flow would be much higher because of the loans being paid off- so nice job catching that! I’ve edited the post above to reflect the more accurate (and awesome!) numbers.

And yeah, you can definitely make this kind of plan happen faster by adding things like flipping and other tactics, or by getting deals below market value. I think you could accomplish this in half the time if a person wanted to get fancy about it :)

Thanks for the comment!

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Antonio Coleman August 2, 2014 at 4:26 pm

Brandon, What makes this even more interesting is that you’re talking about the causal investor. Not someone pounding the roads driving for dollars…we are talking about everyday average people.

Numbers Don’t Lie..

“Antonio Coleman Signing Off”

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Brandon Turner August 3, 2014 at 9:00 am

Hey Antonio, I agree! I think we often work WAY to hard in this business just to make a buck, when great things can happen for the casual investor. Now combine this strategy with the wealth of information BP members learn, like how to find deals 70% LTV or how to force some appreciation through a Rehab or How to make this investment mostly tax free using various tax strategies … and the results can be multiplied!

Thanks for the comment!

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George Smith August 2, 2014 at 5:57 pm

Excellent article. It seems like such a huge hill to climb saving for the first property but its amazing how quickly things multiply once you get a few properties under your belt. Thank you for the insight on strategy that I haven’t seen too many articles about.

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Brandon Turner August 3, 2014 at 9:01 am

Hey George, I know what you mean, it’s not easy to save up a big chunk but you are right – it can really make a difference in the long run!

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Anil August 2, 2014 at 9:08 pm

Great write retirement plan!

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Brandon Turner August 3, 2014 at 9:01 am

Thanks Anil!

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James Pratt August 2, 2014 at 9:41 pm

Brandon, under normal conditions rent and property values will keep up with inflation. One’s assets might be worth a million today and and 3 million in twenty years, yet they won’t be any richer then they are today.

It took me a while (because I’m sloow) to learn that you make your money when you buy. I prefer REOs (60-70 cents on the dollar), rehab them to increase their value and not worry about inflation or appreciation.

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Brandon Turner August 3, 2014 at 9:03 am

Hey James,

Yeah I agree, that’s why I didn’t look too hard into rising rents and rising appreciation, because I assume they’ll stay pretty much the same. So yes, they might have $1.6 million after 20 years, but that will be the same as the $1.2 million had inflation not hit, because rents would just rise with the expenses and such.

And yeah, I prefer to combine this strategy with buying them cheaper and forcing some immediate equity – but that definitely takes some work! :)

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Eric August 2, 2014 at 9:54 pm

My properties cash flow like a madman. And I have only owned most for only six years. I can’t wait for a few more, hopefully everything is even better.

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Brandon Turner August 3, 2014 at 9:03 am

Nice! I hope you are able to recycle some of that cash flow into more properties and multiply your returns exponentially!

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Tim August 2, 2014 at 10:05 pm

Hey Brandon
It’s been awhile. I just got done reading about the Johnson, I have some questions because I am sit in the same boat, if the place they bought costs $110,000 and they put 20% down they would of had to have $22,000 up front and if they are on a fix income where did they come up with the 20% at? Because my wife and I have find places went to the bank and we know that we can get finance but I need 25% We have been saving a little from every pay but it not adding up quick enough and I can’t touch my retirement unless I take a hit of 52% so what other opinion is there?
Tim Tice

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Brandon Turner August 3, 2014 at 8:58 am

Hey Tim,
Great question! And you know, it’t not always easy. In my thinking, they were saving $1000 a month. Essentially, the mostly-stay-at-home mom Jane was running a “Side Gig” selling on eBay to make that $1000 a month, which is the number i used for savings. So $1000 a month is just 2 years of saving to build up $24,000. OR, perhaps Howard used his 401k which he had been adding to from his job and turned it into a Roth401k and used that money to invest. Or maybe they flipped a house.

I guess my point is: no matter how you get there, get there! :)

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James Evertson August 4, 2014 at 6:54 am

I’ll chime in since this piques my interest being in a similar boat. Brandon assumes the money they have saved is in a roth IRA. taxes have already been paid in this case so in the case they will only incur a 10% early distribution.

If you’re genuinely interested in doing this I’d find a bank that only asks for 20%, explore some creative financing to get this 20% (maybe a family loan or home equity), or find some other way to raise capital. Perhaps redirect your money going to IRA to a non-IRA in the meantime? Or if you’re getting a match from your employer continue to contribute and then take it out.

Hope this helps.

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Clayton Camper August 4, 2014 at 5:07 pm

In regards to withdrawing money from a Roth IRA…cost basis can be pulled out without an early distribution penalty. It is the gain within the IRA that would incur a penalty if withdrawn. The 10% penalty does not apply to the original contributions. Please note that if you convert money into your Roth from a traditional IRA you must wait a 5 yr seasoning period before withdrawing those converted dollars penalty free.
I am actually pulling out some of my Roth cost basis soon to get started in Real Estate. However I am leaving my gain to continue growing for me tax free.

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James Evertson August 4, 2014 at 9:33 pm

I thought gains had to come out first?

Jason R August 5, 2014 at 11:35 am

Nope, gains come out first for everything except for Roth IRA’s and life insurance contracts.

Paula Pant August 5, 2014 at 12:16 pm

Hey Tim —

I just wanted to jump in here: When my partner Will and I began investing in rentals, we had very little money. Some ways that we saved:

1) We lived with roommates, despite being in our 30’s. (Well, he was in his 30’s, and I was nearly there.) This instantly turned out out-of-pocket living costs to $0, which allowed us to save for our first and second rental properties.

I know that the common objection to this is: “But we have kids,” but Will’s father had random roommates occupying their guest bedroom back in the 1980’s when Will and his sister were children (which is partly why he’s so comfortable with this savings strategy now.)

2) We drove beater cars. Mine was about 15 years old; his was 16 years old and had 275,000 miles on it (mostly from its prior owner).

3) We ate vegetarian (him) or veggie-at-home (I ate meat at restaurants as an occasional treat) — lots of beans and rice — this cut our grocery bill by about $30 per month.

etc. etc.

Basically, it took a lot of drive + hustle, but we made it. And after the first 3-4 units, it gets easier, because you can reinvest the cash flow from the first few units into the next few. We’re not “done” by any means, but we now make about $35,000-ish per year, net after all expenses, from our 7-unit portfolio (2 units of which we own free-and-clear).

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Christian August 3, 2014 at 7:22 am

Now this is sexy investing!

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Barima August 3, 2014 at 7:23 am

Great post Brandon,

I find myself listening to the podcasts and always getting swept away with different ideas and plans. Sometimes its hard to remind myself that it’s a marathon not a sprint and a huge portfolio can’t be built overnight. I’m definitely going to take this to heart and try to utilize a similar plan along with continued wholesaling. Thanks

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Brandon Turner August 3, 2014 at 8:59 am

Thanks Barima! I know I have to remind myself of that all the time also!

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Simon Ambroz August 3, 2014 at 9:11 am

This was truly awesome, very similar to 7 years to 7 figure wealth, but just awesome. Thank you

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Pete T August 3, 2014 at 9:40 am

I was writing a similar piece- it really is amazing how well REI can work w/o doing anything special at all.

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Brandon Turner August 3, 2014 at 1:02 pm

Hey Pete, thanks for the comment! You should write it!

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Steve August 3, 2014 at 9:42 am

Brandon-
Great article. It really shows the wealth growth potential of real estate if you just buckle down and save as much as possible. I did notice that the second picture of the calculation (I think on the 1st 4-plex) there was no management accounted for. Did they start managing on their own or did the management company manage all these units for $176/month? Even adding in the additional management costs it is still a great path to wealth and retirement. I am soon-to-be retired from the AF (1 Dec) and am looking for new income sources so I can start “buying and holding” here in Eagle River, AK. Again, thanks for the great article!

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Brandon Turner August 3, 2014 at 1:05 pm

Hey Steve, thanks for the comment! It’s definitely possible that I screwed up, BUT I think it is there, it just got cut off in the photo. If you click it, you can see the other expenses and I think it’ll make more sense, I hope!

Thanks!

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Ron Perich August 3, 2014 at 9:47 am

Excellent post, as always! This is exactly the kind of “marketing piece” I need to take to my wife, friends, and family! And it helped me better understand how my 15 year plan could play out. My goal… 15 years and retire. And using this slow, methodical process, I might be able to get there. I really appreciate it!

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James Brown August 3, 2014 at 9:49 am

Great post Brandon.

This is exactly the kind of post that can simplify the process of building a plan to the brand new investor like myself. You are exactly right in that it is easy to get scattered when taking in all the information and podcast available at BP.

As a brand new newbie, i wondered in this scenario, if the Johnson’s would find it necessary to find non-traditional ways to finance their deals at some point or would their incomes and cash flow from the properties they already own be enough to continue to purchase additional properties.

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Brett August 3, 2014 at 10:00 am

Great article Brandon.

This is pretty much the exact playbook I’ve been working. It is simple but not easy. The key ingredient to all this imo is discipline! Few people have the disciplice to live within their means, let alone continue to live below their means as they rack up property 5, 6 etc. For years my family joked about how cheap I was but then when I bought my second investment property and now they see me making offers on the third a few months later they realize their was a method to the madness. Sure I’d love a new pick up, but I’d rather keep my old beater then get a new one and kill the cashflow that will help deliver the next property.

It’s very simple, anyone can do it. Few have the discipline.

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Brandon Turner August 3, 2014 at 1:07 pm

Hey Brett, thanks! Yeah, definitely not always easy, but yeah – saving money each month and slowly acquiring great properties is a great way to build wealth! Thanks so much for the comment!

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Sean August 3, 2014 at 10:14 am

Where does the 20% down come from for the first property? Draining their entire savings account? What about having money for reserves, etc?

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Brandon Turner August 3, 2014 at 1:09 pm

Hey Sean,

Yeah, I kinda assumed they had saved for it. Being able to save $1000 per month, let’s just say, the saved for 3 years prior, which would give them the down payment plus plenty of reserves. They could also get this from a 401k or similar investment. For someone starting with $0 – it would take a lot of hustle to save up $25k or so, but it’s doable. If not, there are no-money down ways to invest (look for my new book coming out on the subject soon!)

Thanks!

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Jacob Forbis August 3, 2014 at 10:33 am

Great post, Brandon. It’s this kind of math that got me excited about real estate to begin with.

Unfortunately for me, my first property’s cash flow has had to be poured back into the property due to unexpected repairs that keep coming up, and I haven’t been able to save up for the next one as quickly as I would have liked. But that really goes back to making sure you are buying right- and if you are buying distressed to do the repairs right the first time.

Despite this minor setback – I am excited to build off of this learning experience, and the wealth of knowledge from the podcasts, forums, and blogs and to continue to build my portfolio – slowly but surely.

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Brandon Turner August 3, 2014 at 1:10 pm

Hey Jacob, i can DEFINITELY feel you there. My properties are the same. It’s the price I pay for buying cheap properties!

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Mike Begley August 3, 2014 at 10:53 am

Brandon, could you please edit the debt payoff section to clarify? You wrote, “When I went through and applied an extra $6000 payment per month toward the first debt, I was able to see exactly how long until the debt was paid off: Nine years.” I think you mean to say, “until ALL the debts are paid off,” right? Lobbing $6k per month at the $72k first debt would clear it in the first year. I read that part three times trying to make sure I was following you.
We started our “boring” rental acquisitions in 2010 on our first flip that we turned into a lease-to-own, and now have six rentals and 1/8 of a 120 unit apartment complex. While it is getting hard to find the super deals now, we still added one home to our portfolio this year and are looking for number seven!
Thanks for the BP platform!

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Brandon Turner August 3, 2014 at 1:12 pm

Hey Mike,

Ah yes, that’s what I meant. “All the debts are paid off.” I’ll fix that right now. Thanks!

And Congrats on your success so far! That’s just awesome. Keep up the good work!

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Dylan Grieve August 3, 2014 at 11:07 am

Brandon,

This is a great post, and definitely motivating/inspiring for those of who are trying hard just to break into this world. Thanks for the post!

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Brandon Turner August 3, 2014 at 1:13 pm

Thanks Dylan! I appreciate the comment!

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Tom August 3, 2014 at 11:17 am

I would love to see the budget of a family of 5 only spending $2000/month on everthing that they need. Anyway, I also can’t find a bank that would give me a 30 year mortgage, all mine only go out 20 years. I also see that you went to the minimum of 5% on the vacancy rate and capex, I’ve heard others on your podcasts say 8-10%. These 2 changes make a big difference in you cash flow analysis.

Tom

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Brandon Turner August 3, 2014 at 1:16 pm

Hey Tom,

I agree on the idea of $2000 per month- I think that would be fascinating to find out. Why not you try it out on paper and let us know? :) I’d also be curious: what if they managed them all themselves and saved all that PM money?

And yeah, the reason I went with 5% was because I was assuming these were nicer properties than the ones I typically buy. I usually buy better deals than this, but they are in worse neighborhoods and usually older.

Thanks for the comment!

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Michelle Moore August 4, 2014 at 5:41 am

Look at http://www.mrmoneymustache.com for a sample budget. His is a family of 3, but it is pretty close. I raised a family of 6 and spent $20,000 per year. It can be done.

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Brandon Turner August 4, 2014 at 2:54 pm

I like that guy :)

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johncey August 3, 2014 at 11:47 am

It really works. I started with this strategy 16 years ago (except I did/do my own management). I started with $5,000 and am now up to over 100 units. I quit my day job 3 years ago to go p/t and then quit that entirely to be a full-time investor this year. I spend about 15-20/hrs week. Slow and steady pays.

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Brandon Turner August 4, 2014 at 2:55 pm

Awesome! I love to hear that, and yes – slow and steady pays!

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Michelle Y. August 3, 2014 at 12:04 pm

Great detailed layout of how the average family can grow their wealth through rental properties. I have a friend who is about the same age as the Johnsons and will be ready in about a year to purchase her first property. I’m excited for her and I’m going to forward this article to her!

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John August 3, 2014 at 12:25 pm

I know these were just example numbers, but do you know of anywhere you can buy a duplex for $110k and rent it for $1600/mo?

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Robert Steele August 3, 2014 at 2:21 pm

Yeah I’d like to know that too.

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Brandon Turner August 3, 2014 at 8:45 pm

Hey John and Robert,

Sure. My area for one, and about 1000 other locations in the US. Remember you don’t have to live there to follow a strategy like this. Also remember it’s only one property every 2 years or so, somewhere in the US. So, I’d like to think it’s possible for those willing to look!

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Michelle August 4, 2014 at 5:43 am

In my town, there is a 4 unit for $99,000 that rents for $2000 per month. (This is a good school district/ not a slum neighborhood. Look in the midwest. There are plenty!

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Cheryl Carrier August 4, 2014 at 9:35 am

Michelle, the most important part of your comment to me is “In my town”. I thought I was a risk-taker, but maybe not. I want to see it, touch it and know the Market cold. I want to review Master Plans, future zoning, employment center trends, mass transit plans (subway), etc. I know most here think appreciation is only a lucky happenstance. I want tenants to buy me properties and my knowledge to “force” the appreciation. I’d love your numbers – what do you expect your appreciation to be? I can’t see myself going that much afar from my home base(s). I live in one of the highest income Counties in the Country, surrounded by another 3 or 4 of the top ten – deals like yours are only available in sub-par nabes that won’t appreciate much absent the easy lending/mania of the early to mid/late 2000’s. I can’t change where I live and I can’t take a flyer on what I don’t know.

Of course I “could”, but I can’t. Best wishes to you. I envy your numbers.

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Joseph C. Cox August 3, 2014 at 12:51 pm

Great post Brandon. I guess the hardest part for most people is saving up the initial 20% down-payment, while avoiding trips to the hospital or losing their jobs!

Thank you for helping us to visualize this simple (not too boring) plan.

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Paul Wurster August 3, 2014 at 1:34 pm

This is exactly what my wife and I do. People think we have some special strategy, but I have to let them down (and my ego too) by telling them that it is very straightforward, conventional, and boring. There is no particular genius here except for the discipline to save and not dip into the cash before it is time to retire.

Do you ever think it is appropriate to pay things down in the middle years as opposed to adding more properties? I’m in the military, and I just moved away from the market where we bought six houses in the last year and a half. I don’t know if I can buy from far away, but the cash is still coming in. What do you think?

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tussant August 3, 2014 at 1:47 pm

Thank you for this article Brandon…Very informative.

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Michael Garofalo August 3, 2014 at 1:57 pm

I don’t want to rain on this parade but it seems very idealistic. In reality we all know there will be some vacancies, capital improvements, and one or two bad tenants in 20 years. We’re these accounted for in the original calculations. I still am a believer and I am following this strategy currently but as was mentioned in other comments you need to still buy right and expect things not going 100% as planned

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Chris Guthrie August 3, 2014 at 2:18 pm

Great post, but it just doesn’t work in my area though :(

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Chris Guthrie August 3, 2014 at 4:30 pm

In case it wasn’t obvious I was joking. Great post Brandon.

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Brandon Turner August 3, 2014 at 8:45 pm

Hah thanks Chris! I was hoping you were joking ;)

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Justin Boldt August 3, 2014 at 2:31 pm

Thanks for writing this! Easily top 3 favorite reads.

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Jennifer August 3, 2014 at 2:36 pm

Hi Brandon. Thanks for this article. I read it with interest, since I’m trying to do something similar, although I’m saving a lot more of my salary and paying cash for ~$65K SFHs. My question/concern is that although I’m halfway into the property acquisition, I am starting to have a hard time finding properties with 10% Cap rates. I’ve been ready to buy the next one (in terms of having the money) for awhile, and can’t find it. I’m wondering if we’re running out of good rental deals. After all, we just experienced a once-in-a-lifetime buying opportunity for real estate, and it can’t go on forever. I had a “ten-year plan” rather like the one you outline here, but I worry that it will be derailed for lack of properties that meet my cap rate requirement.

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Bob Estler August 3, 2014 at 3:45 pm

This would work in some areas we invest in. Milwaukee for example 35K will buy you a house that rents for $850, 70k would get you two of them, and if you are worried maintenance will run higher then expected, then you can buy a third bringing your total investment to 105K.

Keep in mind that this was mentioned as being a few hours from their home. I am sure this was deliberate, if the deal doesn’t fit in your area font be afraid to drive a while.

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Jorge August 3, 2014 at 6:17 pm

Nice write up.

It’s getting hard for me to see what the Phoenix area market is giving me now for RE investing. I’m using a Realtor at the moment to search for opportunities for Buy/Rent/Hold. Trying to find the right deals to buy.

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Cory Binsfield August 3, 2014 at 6:34 pm

This is a great post for all of those folks who are presently discouraged after buying one or two properties and wondering if it’s worth all the time and effort for less than a $1,000/mo.

Especially if you are working nights and weekends since you have a full time job.

Here some real world inspiration.

When I started in 1998 I had numerous critics who thought I was an idiot for working so hard on buying a few rentals that only cash flowed a few hundred dollars each.

At one point, I had a family member tell a close friend that I was working myself to death and he couldn’t understand why I was putting all my savings into real estate since it was such a headache-tenants, toilets and taxes.

Worse, I was living way below my means and all the money I earned from my day job went to rentals. It created a lot of friction in the family but I was determined to hit my goal of replacing 100% of my salary in ten years or less.

Fortunately, I stayed focused on my mantra of one property a year and continued on this path until the traditional lenders refused to give me 30 year mortgages.

From there I found commercial bankers that forced me into 20 yr commercial mortgages and this allowed me to enter the multi-family space.

Today, I could quit my job and put everything on auto pilot if I wanted. It’s kinda of fun knowing that you can walk from your day job and live a very comfortable life.

While I have no plans to retire at 49, at least it’s an option. Plus, my day job is more fun knowing I don’t need it.

Consider this sad fact. The vast majority of Americans will work forty or so years to collect an average social security check of $1,200 per month.

How messed up is that?

By working hard in your spare time for three to five years and acquiring a few few nice buy and hold properties, you could replace your entire social security check.

One thing you missed Brandon-the tax savings.

By becoming a real estates professional (in IRS terms) the couple would pay
ZERO taxes after year ten or so.

This tax savings would easily be $1000 per month. Just the tax savings alone would replace the E-Bay pastime.

Just another reason to buy and hold versus getting hosed by the tax man when you wholesale or flip. It’s the Warren Buffet approach to real estate.

Rock on,

PS, the family member that thought I was working to death is now bragging to his friends about my success!

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Bob Estler August 3, 2014 at 7:12 pm

Cory,

Great story, congratulations on your success. What market(s) are you investing in?

I have always been amazed at how few people are really interested in getting ahead. Sure they talk about how great it would be to be rich but, at the end of the day they would rather make 2 or 3 three car payments and a mortgage then to live frugally and do what it takes to build a nest egg and learn to invest it.

I remember growing up my father passed away when I was young. He had terminal cancer and had just changed jobs before he got diagnosed, so of course being 1973 the insurance company said it was a pre existing condition and refused to cover his bills. My mom was a stay at home wife and never did go back to work, we got a little help from her parents and she invested very carefully and invested her way out of a tough spot.

After that experience as a kid, I always swore I would learn to invest and build a passive income so my family would be provided for no matter what. Glad to see that you have reached a point where that is happening for you.

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Cory Binsfield August 3, 2014 at 7:34 pm

I’m in a Duluth Mn. I’ve purchased all my deals within 10 minutes of my house to make management easier. It’s the sniper approach to real estate. My numbers aren’t at great as this article but it still works since you can buy a cash flow positive duplex up here for 140,000 or less. You just have to wait for the right deal and be patient.

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Bruce May August 3, 2014 at 7:35 pm

Really good article Brandon… squirrel. Where was I. Oh yea, the added advantage that you didn’t even cover is the depreciation they get from each of these properties and the affect it will have on Howard’s W-2 income. Thanks for keeping it simple.

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Jeff May August 3, 2014 at 8:32 pm

This is great in theory until you get a tenant that suddenly stops paying rent. You still are on the hook for expenses lest you lose the property. And it can take a while to get a bad tenant out. It also fails to address even when a good tenant moves out and the time it takes to get a new tenant in. There can be damage and upkeep that wipe out any money you’ve made along the way. There are also more big time investors with more cash than the average mom and pop, and they are buying the great properties in all cash deals (a seller is going to like that more than a financed deal).

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Neisha August 3, 2014 at 9:35 pm

I’m so glad to see an article on buy and hold investments. I think everybody should educate themselves on this strategy as it is a true way to build wealth! I do not agree with other people managing my real estate investments and do not agree with doing this part time! Unlike the stock market, real estate investments can and should be controlled by the investo,r as nobody will run them better than you! If you don’t want to or don’t know how, invest with somebody that does!
If you are investing in properties that are not in your back yard, know your market, know your clientele and cash flow your properties! Before you decide to own rental properties, answer this one question, honestly, “Could you evict a mother and three kids in the middle of winter, with no place to go?” If you answered, NO, than you should not be a landlord! These are investment properties that need to be treated as such, and if you can’t evict them, then I’m glad you can support them! I personally did not start a business to help people out ; make friends or do people favors! It’s all about the numbers plain and simple! If you don’t understand the numbers, don’t invest. I know a lot of people who bought properties thinking they got a great deasl and did not understand the numbers!
Don’t be afraid of tenants, talk to them like they are real people and set boundaries. As with any business, there are risks in buy and hold properties, but there are great benefits as well. Educate yourself so that you can maximize your ROI.

Buy and hold can be slow and boring, but if done right, it is very lucrative. The only regret I have with rental properties is that I did not learn how to invest in them earlier in life!
Happy Investing,
Neisha Vincent

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Cheryl Carrier August 3, 2014 at 9:47 pm

Nice article Brandon! I notice that many are having trouble coming up with the down payment. Here is what a broke couple in their early 20’s did to get started. We had a goal of having 10 rentals by the time we were 30 (at which time I planned to have some kids and stay home “managing” the rentals).

We looked at a lot of properties before we bought our first “home”. We went FHA with a gift letter from my parents to show required reserves. This started our episode as serial mover’s. When we found the next great deal (we always bought fixer-uppers or something under market), we would move, convert existing to a rental and obtain FHA or 95% owner-occ financing on our new “home”. We had eight homes (and moves) in our 20’s. There was one that we only lived in 6 months – we sold it and took a 120K profit. We were lucky and sold some (instead of renting them out) for some very good profits. We even did 1031’s in our 20’s. We also did some great flips – so down payments were no longer an issue. I can’t remember if we had 10 or 12 when I “retired” at 32. My husband still works in his very successful career outside of RE.

Note:

Things were easier back in the 80’s because investors could “assume” FHA and VA loans without qualifying and the seller could take back a second for the entire equity (no money down). We also targeted owner-financing and had a small commercial bank that would do blanket mortgages.

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Jason R August 5, 2014 at 11:55 am

While this may not be as easy today compared to the 80’s, it is still very possible. A person (couple) must be willing to move several times. If you are, you can buy properties for very little down (5% or less). Buy 2, 3, 4, or however many times you can qualify for another mortgage. Use your cash flow from the properties (probably very modest) and living below your means to continue saving money and acquiring properties.

You will be well along the path to financial security after only a decade of sacrifice just like Brandon’s example. Ten years of saving followed by 30 years of compounding is VERY powerful.

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Mark August 4, 2014 at 8:34 am

You forgot Uncle Sam’s cut.

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Brie Schmidt August 4, 2014 at 1:13 pm

Great post Brandon! This is the exact strategy we have been using and it is great to see it laid out like this. Awesome!

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Wendy Noble August 4, 2014 at 2:54 pm

How to save for that first down payment? I’ve never relied on my whole salary. I currently live on 50% of my salary and 50% goes to savings. I started out putting 10% of my salary aside for savings. As I increased my earnings through hard work, raises and promotions, I kept my expenditures about the same. Someone who earns $1000 a month and spends $1000 a month is no better off than someone who earns $10,000 a month and spends $10,000 a month. They both have $0 at the end of every month. If you want some inspiration, read “The Richest Man in Babylon”. Its an old book but a good book and its available online for free on a number of websites, at your library and you can lend it from a friend…. Get the picture? Don’t give your money away unless you have to.

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Jonna Weber August 4, 2014 at 11:13 pm

Love it, and you knew that I would after our chat on the podcast! The numbers don’t lie, and yes, an every day middle class family can do it. Thanks for spelling it out so succinctly as usual.

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Garrett Zander August 5, 2014 at 1:13 am

Maybe I missed something here, but how is there no expenses for repairs or vacancy times? Also who is managing the properties? Also how are they funding the deals? Conventional fincancing? I am not doubting this great strategy just when I read this a yesterday, I had these thoughts pop in my head

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Sharon Vornholt August 5, 2014 at 3:46 pm

Brandon –

This post really points out the virtue of patience. Real estate has always been a “get rich slow” way of growing your wealth, but it is a proven model that works. Having all that income 20 years from now has to look pretty sexy to just about everyone.

Sharon

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raj August 5, 2014 at 6:32 pm

Great article Brandon. Long term investments in real estate don’t look sexy but as years pass by you feel better and better .It is very hard to keep in mind the long term effects and goals but articles like this and others always keep reminding you to stay on point and keep building wealth to achieve peace of mind and have time to do the things you really want like charity, family time, better health etc. Through the years the normal Wealthy people I met always told me to think in long term and build assets and get cash flow don’t worry about too much money now. Live little frugal build better habits and have fun without spending a lot of money. The people on BP are great and even though everyone come from different background in life Everyone is trying to take extra steps to make better Future.

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Patrick W August 22, 2014 at 7:37 am

Excellent article, really articulates the power of investing. What’s especially powerful is that you don’t take into account appreciation or amortisation of the loan, this really does take the speculative element out of it and makes it clear as day what can be achieved without relying on the price increases, and then any further appreciation is a bonus.

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Jim Esposito August 30, 2014 at 10:42 am

Very intelligent article, though don’t know how many people will listen. Most investors today seem to get seduced by lure of fast money, but smart investing in properties with inherent value is always a good approach. And a lot less stress. Short term, high return investing always involves a lot more stress, a lot more volatility. This is a very good program, very good advice.

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Jen Kurtz September 22, 2014 at 7:53 pm

This is exactly what is appealing to me about buy and hold, for the same reason I prefer index funds. I can understand the thrill of flipping, and may attempt some wholesaling since I won’t get any skin involved, but I won’t flip for the same reasons that I am not a day trader. I admire it, but it is not for me. Although I would help any possible flippers in my markets I know well with research.
I had to laugh at the first few sentences of this blog, because when I first joined I found myself hoarding/saving posts in categorical folders in my bookmarks to come back to later. I quickly had so many that I knew I would never have time to go back and read them all again-let alone keep adding more!

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