Floating Rate Debt, High Leverage, and the Multifamily Mistakes Destroying Investor Returns

Share via:

• Facebook
• X (Twitter)
• LinkedIn
• More

Subscribe via:

Show Summary

In this episode, host Dylan Silver speaks with Kyle Theodore, Head of Capital Formation at Vanamor Investments, about capital raising, multifamily investing, and navigating today’s challenging real estate market. Kyle shares lessons learned from sitting out much of the 2022–2024 cycle, emphasizing discipline, conservative leverage, and the importance of fixed-rate debt. The conversation explores light value-add strategies, property management alignment, California multifamily opportunities, and why existing assets often outperform new development. Kyle also discusses workforce housing dynamics, rent growth expectations, ADU conversions, and operational improvements as key drivers of returns in the current environment.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • Vanamor’s Website
    • Kyle Theodore on LinkedIn
    • Vanamor on LinkedIn
    • Kyle Theodore’s Email Address: [email protected]

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Kyle Theodore (00:00)
  Look, I think there’s a handful of mistakes that are a function of people trying to do deals when they shouldn’t. ⁓ We didn’t do any deals between 2022 and 2024 except for a single 1031 exchange. And that was only because we needed and wanted to get out of an asset that had gone up so much that we felt like we were compelled to sell it. ⁓

  So I think it’s the sort of desire to do deals when you should just sit on your hands. I think it’s also how you finance a deal. I think back in 22 and 23, a lot of people were using floating rate debt, they were using very high leverage. And those two things will blow up a deal.

  Dylan Silver (02:18)
  Hey folks, welcome back to the show. Today’s guest, Kyle Theodore out of beautiful Newport Beach, California is the head of capital at Vanamor Investments, a multifamily value-add investment firm, and also spearheads the equity formation process for the firm’s portfolio. He has over 25 years of experience in the institutional investment space, and he’s a graduate of Claremont McKenna College, holds an MBA from Yale, and is a CFA charter holder. You can find him at vanamor.com or on LinkedIn. Kyle.

  Thank you for taking the time today.

  Kyle Theodore (02:48)
  Of course, happy to be here. Thanks for having me on.

  Dylan Silver (02:51)
  Now, when we talk specifically about capital raising and deploying capital into real estate, this has been a challenging five or six years to be in this space. I’ve talked with many folks who many have done well, but some have struggled. And as someone who’s active in this space, and we were talking a little bit about this before hopping on here, I’d like to start by asking, for folks who are raising capital and who are deploying other people’s money,

  What do you think is the biggest mistakes that some people are making now and then also maybe over the last couple of years?

  Kyle Theodore (03:28)
  Look, I think there’s a handful of mistakes that are a function of people trying to do deals when they shouldn’t. ⁓ We didn’t do any deals between 2022 and 2024 except for a single 1031 exchange. And that was only because we needed and wanted to get out of an asset that had gone up so much that we felt like we were compelled to sell it. ⁓

  So I think it’s the sort of desire to do deals when you should just sit on your hands. I think it’s also how you finance a deal. I think back in 22 and 23, a lot of people were using floating rate debt, they were using very high leverage. And those two things will blow up a

  We never use floating rate debt. So all of our debt typically has the same duration or longer duration than our expected hold.

  So if we have a five year hold, we have five or seven year paper and it’s all fixed rate. We’re also a low leverage player. We’re typically 60 to 65 % LTC, but the deals that I saw getting done in 22 and 23 were at 80, 85 % leverage and they were using floating rate debt. And that’s a recipe for disaster.

  Dylan Silver (04:44)
  Now, from the outside looking in, and I’m just using my perspective as someone in the single family space, right? So if I’m working with buyers and they’re asking me, know, hey, we’re looking at…

  ⁓ an adjustable rate mortgage or maybe we’ll pay more for a fixed rate. I’m kind of inclined to say, well, you can’t see into the future. So it may cost you more right now for the fixed rate, but over the long term,

  you’ll have more stability. At least you’ll know what the rate is going to be. It’s not going to double. I feel like that same type of logic applies it to multifamily investing. At least it should.

  Kyle Theodore (06:03)
  100 %

  100 % and I think it’s again, it’s people get greedy and stretch to do deals when they shouldn’t. And if it doesn’t pencil with fixed rate debt, debt, you shouldn’t do it. You know, my home in Newport is financed on a 30 year fixed rate mortgage at 2.75%. Right? I wish I’d taken more money out when I when I refied it. ⁓ Because I’m sitting on a lot of equity in the home. But

  That is, that’s, you the two things you can control are, you know, what you’re paying for insurance and what you’re paying for debt. Those are the two big variables on financing a deal. And if you can’t get it to finance on fixed rate debt with the same term as your expected hold, you shouldn’t do the deal.

  Dylan Silver (06:51)
  Now when we talk about value add, a lot of times people may think about, there might be some level of physical distress in the property, but I’ve seen more and more that there could be like operational distress. Do you have a preference for one or the other, or do you need maybe a little bit of both in order to ⁓ have a successful project happen?

  Kyle Theodore (07:12)
  Typically, we are a kind of light value add operator. So our price per door on average is 10 to 15,000. We’re mostly doing flooring and cabinets and countertops and putting in stainless steel appliances, putting in new lighting, maybe resurfacing the outside of the building, putting new paint on it, maybe adding an amenity like a barbecue area or a gym or something.

  We’re now in California doing some ADU conversions where we can take a place that’s over parked and add additional apartments to the existing ⁓ door count. But we’re not typically kind of heavy value add. We’re buying fully occupied buildings. So our typical occupancy ⁓ at purchase is somewhere between 90 and 95%. So we’re typically not a science experiment.

  Dylan Silver (07:45)
  Yeah.

  Kyle Theodore (08:08)
  We don’t empty the building and then renovate the whole thing and then try to retentant it. We’re just doing value add as we get unit turnover and then commanding higher rents on that kind of refresh. You know, we’re typically 2000, nineties and newer, 2000s and newer. So 20, 25 year old buildings that just need a bit of love to kind of look modern. We’d like to stay nineties and newer because we want nine foot ceilings. You can’t make a low ceiling high.

  And typically a ⁓ 90s and newer will have nine foot ceilings and those show better versus new product. So you typically will command better rents than you will on the kind of 70s and 80s stuff.

  Dylan Silver (08:49)
  Now for dealing with property management and the existing property management, I’ve heard from people who buy multifamily properties that in some cases you might have a property manager that may not be

  overseeing the property correctly, but that in order to bring in a new property manager, that that’s going to be potentially challenging as well. So sometimes you have to decide, well, is this property manager, you know, maybe so mishandling the property that we have to bring in somebody new, or can we maybe keep them in there, but monitor the process, basically manage the property manager? What’s your perspective on that?

  Kyle Theodore (09:28)
  I guess a couple of things on property management. One, we use third party property management for all of our properties as opposed to doing any self-managing. I think that’s important from an LP and investors perspective in that we’re on the same side of the table as they are. We’re trying to negotiate the lowest possible property management costs. When you have a dedicated property manager, and I won’t say we’ll ever, you know, we won’t ever do that, but at some point, ⁓

  you’re not going to fire yourself, right? And it’s another layer of fees that LPs are paying.

  Now, we still have some incentive to keep a dedicated property management fee low because we want to hit our prep. But I feel like that has better alignment of interest. For me, it’s more about who the individual person is. We typically use FBI, they’re a big, very large national company. We’re not

  wedded to them. So if there’s a market where we think we can get a local property management company that’ll do a better job, we’ll use them. But we’re 100 % actively involved in the hiring process of the local people. So when we when we take over a property with FBI, we interview the leasing agent and the maintenance person. Personally, we do weekly calls for every single one of our properties to kind of talk through vacancies, any repair orders.

  kind of upgrades that we need to do. So I think being really engaged and having a third party property manager, at least for our model is what works, doesn’t mean it’s always perfect. But we have enough leverage with FBI that if we’ve got someone who’s not performing in a particular unit, we can get them swapped out. I think, but at the end of the day, the tenant doesn’t know that they have FBI, they know they have, know, Don, the maintenance guy and Sue, the leasing agent, right? So

  Those people matter a lot. And I think being part of that interview process is important.

  Dylan Silver (12:03)
  Yeah, I mean, I’ve spoken with ⁓ multifamily operators who’ve told me, you know, they’ve changed property managers only to realize during that change, it caused so much turbulence that they might have as well just kept the maybe underperforming property managers in there and tweak some things. So not necessarily always just changing can be a solution. It might cause some more issues.

  Kyle Theodore (12:24)
  No, it’s an expensive thing to do and it creates friction. And so you’re much better off trying to replace the individual person that’s underperforming than the property manager, unless you’re having a kind of persistent problem with getting the attention of whoever the property manager is.

  Dylan Silver (12:43)
  I want to pivot a bit here and ask you about the multifamily space in California in general. I know you’re based in California, investing in a number of different states, Utah, Nevada, Texas, Arizona, Florida. But ⁓ in California specifically, is there still a trend where you’re still seeing a lot of new multifamily housing going up? know a lot of new construction isn’t necessarily penciling, but are you still seeing a lot of new multifamily ⁓ construction ground up?

  Kyle Theodore (13:12)
  Not

  a ton. ⁓ And to be fair, you we only really operate in Orange County, Riverside County and San Diego County. There are a lot of, mean, I just got off the call with a large investor that is pencils down on California. He just doesn’t want to own in the state. And I get that sort of feeling, right? Because obviously the politics here aren’t great and tenant landlord laws favor the tenant in most cases. Those counties are pretty conservative.

  ⁓ and tend to have better kind of relationship, you know, tenant landlord laws. ⁓ We find because there are a lot of people with pencils down, there’s real opportunity in California, but you have to be very selective. Like we’d never be in Santa Monica. We’d never be in San Francisco, you know, LA County in general. And so I think it’s important to know where you’re investing from a micro market perspective. And I think there’s opportunity. I think from a new construction perspective,

  there’s some urban infill, there’s some stuff maybe that’s getting done. There’s not a lot of new development in California, because as you suggest, it just doesn’t pencil, you know, the current property that we’re under contract, we’re buying at 40 % below replacement, and 10 % below the last appraisal. So why would why would you ever build a new one?

  Dylan Silver (14:30)
  Yeah, and that’s part of the challenge, I think, because people are trying to address this housing crisis, right, which I think a lot of people, especially young people, feel. But then you also have to realize that there’s investors involved in these deals. And when there’s COVID moratoriums on rent, I guess it depends who you ask. Some people said we did great during COVID because people were basically getting the money from the government and we were guaranteed to get paid. Other people said we didn’t get paid. And other people said we had no issue. But when you have

  disturbances and turbulence like that and then you also have more people building in markets like Texas specifically where I’m licensed

  it can have a very ⁓ really disastrous impact on on multifamily investors at large because remember when with these projects you’re starting and then it could be 18 months two years maybe even three years before it’s a hundred percent finished so in that time you’re looking at a totally different set of market conditions

  Kyle Theodore (16:09)
  Yeah, and that’s why we typically don’t do any ground up. We buy existing structures that are fully tentative. So we know what the economics are. Development can be very profitable if it works and if your delivery coincides with kind of a demand surge. But you look at some of the projects that went on in Austin during that huge boom.

  Dylan Silver (16:31)
  Yeah. Yeah.

  Kyle Theodore (16:34)
  you they thought it was a great market until they started delivering into, you know, a real glut. And, you know, they couldn’t command the rent people. I mean, they I mean, at the height, I think they were giving three month rent concessions just to get people into the projects. And you can’t, you know, if you give a quarter of your annual revenue away, it’s very hard to make money.

  Dylan Silver (16:46)
  Yeah.

  I mean, I don’t want to say it’s going on still to that degree, but I have ⁓ multiple contacts who are telling me that there’s places that are heavily incentivizing right now, not just in Austin, but really all across Texas. And it’s interesting because when I was living there, this didn’t feel like that long ago, maybe four or five years ago, that was not the case. You were still having to pay like first, last, you know, finders fee. I was like paying all these different things. said, gosh, I hope this is going to good use. But now it’s almost like they’re paying you in some cases to move.

  and it certainly feels that way. I would like to ask you specifically about the tenants themselves. mean, when you’re purchasing these properties, they’re going to be occupied, you mentioned like 90 % occupancy. Are you also able to see like delinquencies, what percentage of the tenants are paying in on time? And then also too, do the operators themselves, I know they don’t always do, do the operators themselves always have good books that you can rely on?

  for that type of thing. ⁓

  Kyle Theodore (17:56)
  Yeah, I would say in general, the data is pretty good. ⁓ Before we buy any property, we always ⁓ look at rent rolls and ask for current rent rolls. We also do a drill down into kind of AGI and sort of what the tenants are making, right, the ability to essentially pay their rent. ⁓ The project we’re going right now, which is Riverside County, think it’s a hundred and fifty five thousand dollar average AGI.

  which I don’t know how they’re making 150,000 out of Riverside, but you know, it supports, you know, pretty high rents. And that’s important to us. So we always look at that. And I think that’s really important. It’s part of the due diligence that’s on the kind of tenant side as opposed to the building side. But you know, you also want to look at roofs and and HVAC and any deferred maintenance, right? It’s part of what you have to do as an operator to ensure that you’re not buying

  a science project and we don’t do science projects.

  Dylan Silver (18:55)
  Now, I’ve heard this term workforce housing or like renting renters by necessity. And I’ve heard it mean a couple of different things when I hear it. think like, people who maybe would like to buy but have been shut out of the buying market and now they’re renting under those conditions. It almost seems like, hey, we can increase rents every year because these people need a place to stay. And but, you know, they would like to be here. We have an upscale or luxury housing for them.

  find that, you know, wherever you are in the country, that you can continue to raise rents, whatever it is, five percent a year, and that that will always pan out.

  Kyle Theodore (19:35)
  No, think ⁓ having an expectation of sort of always higher rents in ⁓ today’s market is challenging. ⁓ I think what we’re trying to do is buy stuff that’s just outside of workforce housing. So slightly higher sort of ⁓ tenant quality. And ⁓ one where we can pass modest rent increases, you 2%, 3%.

  and still have the project pencil. you know, a lot of a lot of the markets are actually seeing falling rents because of the supply and you know, Arizona and Texas are sort of the poster childs for for that, because there’s still just a lot of supply. What’s interesting, though, is we’re starting to really look in those Sunbelt markets, we’re trying to do deals there. So far, we haven’t ⁓ found one that’s penciled for us. But we think that market’s starting to turn.

  Dylan Silver (20:08)
  Yeah.

  Yeah.

  Kyle Theodore (20:30)
  If you look at new construction, it’s off 90 % in those markets. so eventually that product will get absorbed and it’ll be a ⁓ good time to be an owner. I think we’re probably 12 months away, maybe 18 months away from that being the case. And so we’d like to be there ⁓ because nobody’s building new projects.

  Dylan Silver (20:53)
  Yeah, I mean, they’re not penciling, right. And because of that, you’re also seeing some, I would say, alternative projects going on, not just in multifamily, but I’m talking to investors in Los Angeles and right in California, right, who are building lots of ad use. There seems to be lots of ad use happening, I guess, everywhere in California, specifically in Los Angeles. I don’t know how much institutional guys like yourself are looking at ad use because, you know, these might be in someone’s backyard. But in general, do you feel like there’s

  and energy surrounding ADUs in California is the common man and woman looking at, maybe I’m gonna put an ADU in my backyard.

  Kyle Theodore (21:31)
  Yeah, there’s a another operator that I’m pretty close to where I know his construction guy, they’ve, I think at 230 ad use, they’ve worked through about 80 of them, he’s still got 150 to do. And it’s existing projects that they own, where they’re over parked, or there’s the opportunity to add additional tuck under apartments in the garage space. We actually are other Riverside

  project, we are doing ad use, it was heavily over parked, I think 1.9 parking spots per unit. And so we’re going to do ad use and some of the garages, there’s 100 garages. And so that’s, that’s a good add on our current project, we’ve got some office space on the second floor that we’re going to convert to ad use. So it’s not typically the driver of return, but it’s a nice extra

  lift on a project if you can do some ADUs. California is unique in that both ADUs and solar pencil. So we’ve also been doing solar for the common ⁓ areas to kind of reduce the running expenses of the property. That’s another way to kind of generate more revenue by just lowering your expenses.

  Dylan Silver (22:47)
  I mean, the office to ADU conversion, that’s an interesting one. I’d like to learn more about that. I guess there’s a lot of ADU development conversion happening in general in California. We are coming up on time here though, Kyle. Any new projects that you’re working on and then also what’s the best way for folks to get in contact with your team?

  Kyle Theodore (22:59)
  For sure.

  Sure. So we’re currently raising for a project that’s out in Riverside. It’s a two building project. We’re buying it directly from the developer. Developer has operated it less well than he developed it. And so we think there’s some operational lift we can get. As I mentioned, we’re going to do some ADU conversions on some second floor office space. He’s got one. So there’s two units. It’s two buildings. One’s 89.

  doors, the other 36 doors, the larger one has a rental apartment that’s available to tenants to rent gets rented like three or four times a month, we’re going to just turn that into another unit. So we’ll get, you know, a full time tenant in there. ⁓ So the little things like that, where you can sort of get an operational lift and operate it, you know, better than the developer did, ⁓ is how we get to kind of the numbers that we’re trying to get to.

  Now this one I think is a in place cap rate of six three, we’re buying at 40 % below ⁓ what it would cost to actually build it today. 10 % below the last appraisal. We’re seeking to get a 15 and a half percent IRR over a five year hold. So it’s a pretty attractive deal. Some people don’t want to be in California. But if you want to be in California, I haven’t seen a ⁓ six plus cap rate in a while.

  So it’s a pretty juicy deal. It’s a $40 million purchase price. We’re raising $15 million in equity. We’ve got about three left. ⁓ If anybody’s interested in kind of learning more, they can go to vanamor.com, which is our website. My personal email is ⁓ Ktheodore, so K and then T-H-E-O-D-O-R-E at vanamor.com. Feel free to send me an email. I can get you kind of linked to our portal.

  that would not only sort of let you know about this specific deal, but future deals that we have and would love to talk to any active real estate investors that are interested.

  Dylan Silver (25:12)
  Kyle, thank you so much for coming on the show. Thanks for your time today.

  Kyle Theodore (25:15)
  Yeah, really nice to meet you. Thanks for the time.