An Oakland, California real estate investment fund is carving out a niche that might work in other areas with roughly similar demographics: Acquiring and turning around lower-cost single family houses in neighborhoods outside San Francisco with strong mass-transit connections to urban employment centers and good job-growth potentials.

But rather than flipping the houses it acquires and fixes up, McKinley Partners is renting them out for as long as five years in a two-step strategy - pocketing solid cash flow in the interim, and banking on a stronger sales market down the road.

McKinley has raised $6 million for purchases in targeted neighborhoods: It scrupulously avoids subdivision houses, it pays no more than $80,000 to $90,000 cash per unit - prices that are often drastically below what the same properties commanded four years ago.

The fund budgets about $19,000 per house for a two-stage renovation process, says managing partner Gregor Watson, who talked with Realty Times last week. The first $9,000 goes toward the basic fix-ups needed to attract tenants willing to pay $1,200 to $1,500 a month.

Several years after purchase, the houses will get another $10,000 of improvements to reposition them for sale - assuming market demand has improved.

The capitalized rent levels McKinley's turnarounds are commanding suggest the “true” economic value of the houses are closer to $170,000 today, says Watson, not $100,000 or less the partnership is putting into them.

If all goes as planned - the recession ends and San Francisco resumes its employment growth -- the houses should generate sales prices of $200,000 or more in an average of five years down the road, Watson says.

In an interview with the san Francisco Chronicle, Watson said the fund is currently focusing on older houses in three Contra Costa county communities - Antioch, Pittsburg and Bay Point - where its renovate-for-rental formula appears to work best.

The houses all have been victims of the boom and bust cycle, and illustrate the “over-correction” in pricing that's been underway in the Bay area. In one recent case, McKinley Partners purchased a three bedroom, 1 _ -bath property for $84,000 - a massive discount from the $412,000 a buyer paid for it just four years ago.

The house got $9,300 in pre-rental renovations, and now is rented out to a family that's paying $1,500 a month.

McKinley's strategy, says Watson, is based in part on an investment model that incorporates detailed property valuation and employment data back to 1985. McKinley cherry-picks houses that meet its strict locational, price and physical criteria, then manages the rental intensively.

Sounds like a smart plan.