Another Novel Approach
To Real-Estate Investing

Low volatility and high long-term returns can make residential real estate an attractive investment. Becoming a landlord for a single-family home, however, can bring headaches, and finding the right properties requires more than knowing what's down the block.

A fund developed by Washington investment-management firm Redbrick Partners LP allows individual investors to buy shares in a diversified portfolio of single-family homes, with nary a thought about having to fix a broken water pipe at 1 a.m. or researching up-and-coming neighborhoods.

The concept of single-family real-estate funds is untested in the U.S., according to people in the industry, a fact that Redbrick Partners attributes to the labor intensity involved: In addition to market- and neighborhood-level research, the firm physically inspects each property. However, single-family real-estate funds have been gaining in popularity in recent years in Britain.

With the goal of buying about 150 single-family properties valued at around $10 million by April, the Redbrick Partners Fund is cutting a new path in the rental investment market, according to people in the industry. The fund buys houses for around $70,000 that rent for around $1,000 a month in a handful of "stable working-class neighborhoods" in New Jersey and Connecticut with active rental markets, a good balance of rental and owner-occupied properties and a strong ratio of annual rent to the purchase price of the home.

The firm has hired a professional property manager to maintain the properties.

The fund, which closed in December, has about $3 million in equity raised from about 30 investors, according to managing partner Tom Skinner, and is expected to earn 23% annually, net of fees, over the seven-year life of the fund, including cash flow from rents and appreciation of the properties. Redbrick Partners expects to soon begin raising money for a second fund, which will have $15 million in equity and almost 1,000 properties.

Redbrick Partners was founded in 2002 specifically to create and manage Redbrick Partners Fund and others in the future. Mr. Skinner, a former McKinsey & Co. management consultant with a Ph.D. in economics from the Massachusetts Institute of Technology, expects future funds to attract large institutional investors with a portfolio of homes in markets across the country.

Redbrick Partners' single-family housing fund differs from existing real-estate investment options such as real-estate investment trusts, or REITs, which invest in commercial property or multifamily housing. Also, the fund is a limited partnership open only to individuals with at least $200,000 in annual income or $1 million in net worth and isn't publicly traded or regulated. The minimum investment is $100,000.

At the end of the fund's seven-year life, Redbrick Partners will try to sell the homes either to an owner-occupant -- though not necessarily the current tenant -- or in bulk to another fund or large investor.

Fees to investors will run 3%-6% annually, depending on the performance.

Risks to investors include the possibility that a significant number of the fund's properties will remain vacant, depriving it of cash flow. And if a large employer flees any of the markets where the fund is invested, housing prices could drop sharply. Mr. Skinner says that historically, residential real estate isn't significantly affected by rising interest rates, and that the approximately $7 million in debt acquired for the initial purchase of the homes is locked in low rates.

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