September 18, 2022

JF2936: Why Investors Lose Money in Multifamily ft. Bobby Larsen

Bobby Larsen has spent virtually his entire career in real estate. He earned his broker’s license while studying as an undergraduate, working in the sales part of the residential industry through his graduation. He then moved on to the investment world, working for a large asset manager based out of Newport Beach. 12 years, later, he launched Vanamour Investments, which strategically invests in multifamily communities throughout the United States through syndications and joint ventures with high-net-worth, family office, and institutional investors. 

Today, Bobby is the founder and principal of Vanamor Investments. He is a GP of 400 units across seven properties totaling $115M in AUM, as well as an LP of 10,000 units across 34 properties. In this episode, Bobby tells us how he qualifies operators as an LP and how he establishes trust with LPs from a GP perspective, plus his thoughts on why investors lose money in multifamily and why he believes now is a better time to invest than it was six months ago.


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Bobby Larsen | Real Estate Background

  • Founder and principal of Vanamor Investments, which strategically invests in multifamily communities throughout the United States through syndications and joint ventures with high-net-worth, family office, and institutional investors.
  • Portfolio:
    • GP of 400 units across seven properties, totaling $115M in AUM
    • LP of 10,000 units across 34 properties
  • Based in: San Diego, CA
  • Say hi to him at:
  • Greatest Lesson: Never stop learning and use those tools to continually adapt/evolve to a changing environment.



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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless. This is the world's longest-running daily real estate investing podcast, where we only talked about the best advice ever, we don't get into any fluffy stuff. With us today, Bobby Larsen. How're you doing, Bobby?


Bobby Larsen: I'm doing great, Joe. Thanks for having me on the show.


Joe Fairless: Well, I'm glad to hear that, and it's my pleasure. A little bit about Bobby... He's the founder and principal of Vanamor Investments, which invest in multifamily throughout the United States, through syndications and joint ventures with high net worth individuals, family offices and institutional investors.


His portfolio consists of, as a general partner, 400 units across seven properties, and as a limited partner, he's in 34 properties. Based in San Diego, California. So with that being said, Bobby, do you want to give the Best Ever listeners a little bit more about your background and your current focus?


Bobby Larsen: Yeah, absolutely. So that was a great summary. To go beyond that a little bit, I've spent virtually my entire career in real estate; I come from a family of two real estate brokers. I got my broker's license while I was an undergraduate and worked in the sales part of the residential industry through undergraduate. Once I graduated, it wasn't really what I wanted to do, but I thought I had some skills already in that industry, so I wanted to go into the investment world. So I started off in a broader spectrum of office, retail and multifamily investments for a large asset manager based out of Newport Beach. And fast-forward 12 years later, after acquiring about 15,000 units throughout my career, I started Vanamor. And we basically, as you said, focus on both syndication and joint venture of existing multifamily properties.


Joe Fairless: So let's talk about this. You were an asset manager for office and retail, correct?


Bobby Larsen: Yeah. Right out of undergrad, and a number of years ago, but I used to work at a company called PIMCO, pretty well known across fixed income equities, as well as alternative investments, which is where I focused for them. And given the size of the company and the amount of equity they were trying to place, they had a focus across all asset classes.


Joe Fairless: Okay, across all asset classes... So you were doing asset management for multifamily in addition to office and retail?


Bobby Larsen: Correct.


Joe Fairless: What percent would you say were you focused on -- and I heard you, you said this was a while ago, so with that being said, what percent were you allocated, would you say, of your focus, on the different property types?


Bobby Larsen: It was probably about 25% of focus on multifamily, 50% was office, and then the remainder of 25% was really spread across retail, hospitality, various industrial and unique asset classes.


Joe Fairless: About how long did you work there with this percent allocation?


Bobby Larsen: I was there for four years.


Joe Fairless: Four years, okay. Then after four years, you ventured out on your own and started your own business, and you created Vanamor, or was there something in between?


Bobby Larsen: Not quite. It was a long process; all what I had in mind was I wanted to start with the biggest companies possible, use their resources and educational tools to really learn the industries, and then I went smaller and smaller. So from PIMCO, I went to graduate school, I went to Duke University for a couple of years. But after that, I landed in San Diego, where I am today, working for another sponsor based here in San Diego. When I joined them - this was 2014 is about when I joined them... They were managing about 8,000 units, they were also raising for what they called friends and family in the syndication network. And across the six years that I was with them, we acquired 15,000 units, and grew their portfolio from about 800 million to about 6 billion over that time. And they also just focused exclusively on multifamily.


Joe Fairless: Okay. And then after that, is that when you started Vanamor Investments?


Bobby Larsen: After that is when I felt comfortable enough, I knew multifamily was the focus that I wanted to be in, and I spun off completely full-time and started Vanamor.


Joe Fairless: Four years as an asset manager and 50% of the focus approximately was office, then you went to grad school, and then after grad school you worked for a sponsor that was focused it sounds like exclusively on multifamily, correct?


Bobby Larsen: Correct. After coming from PIMCO, I knew multifamily was the focus I wanted to have.


Joe Fairless: And why is that? Why not office? Because that's what 50% of your focus was for four years; you knew it well... So what about that?


Bobby Larsen: Great question. And this is probably one of the most common conversations I have with other people in the industry, as well as our investors... And when I step back, a) I like real estate across the board, because typically, it's a long-term, attractive investment asset class. What I liked specifically about multifamily versus your offices, your retails out there is that the secular trends, the secular meaning the long-term trends of what is the tailwind that are driving behind that asset classes. In office, you're battling different secular trends that are against you, especially now with work from home. But before that, even office space per employee, that square footage space was coming down, it was getting smaller. And then whereas in multifamily, the trends behind multifamily investments are all with you. So over time -- there's good news and there's bad news, but multifamily, if you hold it long enough, you're going to make money, it's going to be an appreciable asset.


Joe Fairless: Have you looked at the trends for office space per employee? Because I would guess after COVID it's not decreasing anymore, it's increasing. But that's just me guessing...


Bobby Larsen: Yeah, the short-term trend of where the space per employee is certainly increasing from 2020 levels, but it's down considerably since the 2019 level. I think most surveys you see from employees - obviously, and it's probably no surprise that most employees, I think it's probably about 70%, wish they had full-time work from home... And I think even on the corporate level, the chief executives within companies are planning some combination of work from home, and partially in the office. So those two trends, while they're rebounding from 2020 levels going forward, I think we have adjusted to a new norm.


Joe Fairless: What about retail? And I know, you've been focused on multifamily for a while... But I would like to get your thoughts on retail, because there's always gonna be places like nail salons, where people go get pedicures and manicures and haircuts, which I need one. There's always been places where you have to go into and physically be present, so there's always going to be demand for retail, right? Or not...


Bobby Larsen: I think there will be. Maybe I'm historic in this, but sometimes I prefer just to go to a store, find the physical item that I'm looking for, and purchase it. It's not always easy to find stuff online, so I think because of that, we're never going to go away completely with brick and mortar. Even with the new apps they have out there with clothes, you can't match your size perfectly with an app that scans your body, and everything like that nowadays. There's still desire to actually be in a store, feel what you're purchasing, and actually purchasing the item.


So I think long-term -- again, it ebbs and flows... Sometimes the perspective is that brick and mortar is going to go away completely. And that's just not the case. I do think it will be a headwind going forward, but we'll have malls for decades to come, if not forever.


Joe Fairless: So why not focus on retail?


Bobby Larsen: Because like I said, there's an ebb and flow to it. So it depends on the other side of the equation. So you have supply and demand, and it's the demand side of it. So it depends -- when you're making the theory that the property that you're buying is going to be one of those properties that will last the test of time, you're betting on that specific property, which in every asset class, there is a component of that. But in multifamily, the saying is that the rising tide lifts all ships, and the secular trend - that's the rising tide. Retail doesn't have that rising tide. So you can make a good bet that that particular mall or store that you're buying will do well, and it may, but it also may not. So you don't have the same rising tide effect.


Joe Fairless: Out of college - I assume you got your undergrad, because you went to grad school... Correct?


Bobby Larsen: Correct.


Joe Fairless: Okay. Out of college you did what -- was PIMCO the first place you worked at?


Bobby Larsen: It was.


Joe Fairless: Okay. So out of college, you went to PIMCO, worked there for four years, then went to grad school, then after that you worked somewhere else for six years. I'm curious to get your thoughts on it, and what I'm asking is not necessarily if you could go back would you change it, because that's a ridiculous question, because everyone always says, "Well, I wouldn't change anything, because I wouldn't be where I'm at today, if this didn't happen." So I'm not gonna ask that. But I'm gonna ask that for other people in a similar position, if they get their undergrad, and then they work for a company doing asset management, learning different property types, and how to manage them for about four years, what would be a better use of their time - going to grad school, or working for another company for a year or two, instead of grad school, related to the business? What are your thoughts there?


Bobby Larsen: Excellent question. And it's a complicated one, to be honest, because I guess it's not the best response, but the response I would give you is it depends. Grad school, when I look at it, it's what you make of it. Namely, it's the networking that comes out of it. Yes, you do hone your skills, and you learn a lot educationally, but the main benefit coming out of grad school is the network of your other classmates, it's your teachers, it's the assignments that you're working on. It's what you use in that network that can really propel your career.


The same could be said for another position too, though. So I guess, long story short, it depends. And my one bit of advice that I would give to anyone, whether they're just new to the industry, or coming out of undergraduate, is never stopped networking. Expand your network, whether you're working for someone else, or doing your own operation; continue to network, and never let that slow you down.


Joe Fairless: Let's talk about your LP investments first. You're a limited partner in 34 properties. Does that mean it's 34 separate investments, or are you invested in portfolios, and so it's less than 34, but separate investments?


Bobby Larsen: 34 separate properties. So I actually haven't invested in a fund before. So these are individual properties that were



Joe Fairless: Go it. So you're a limited partner on 34 separate investments. How many operators are you invested with, approximately?


Bobby Larsen: Three operators. The high number - the reason for that is that I had a GP position in my last position I held as an acquisition director for the other sponsor; so that GP position is rolling forward into other properties that they continue to acquire, as well as some of their properties that I acquired for them.


Joe Fairless: I'm just talking LP positions right now.


Bobby Larsen: So not to complicate it further, essentially working there, part of the compensation structure was a percentage interest in the general partnership. So most people think when they think general partnership is that they have a controlling share of that property. These are percentage interest in the GP interest without the controlling share. So it's essentially what I still refer to as an LP position.


Joe Fairless: Got it. Okay, so you have GP interest, but you're not calling the shots, so you're passive, and with that GP interest - you're categorizing that as limited partnership interest.


Bobby Larsen: Yeah. And even when those properties are sold, that GP interest is then converted into LP interest in the upleg that's identified.


Joe Fairless: Awesome. Okay. So of the 34 investments, how many are with that group, versus groups outside of that one?


Bobby Larsen: Off top my head I think it's about 22.


Joe Fairless: Okay. So you're with two other groups outside of the one that you worked at for six years. How did you identify those two other groups as groups you wanted to invest with?


Bobby Larsen: Good question. They're both with groups that I was very familiar with, groups that I was "competing" with in that other position; I guess it's not really direct competition in the space, but the groups that were buying similar assets of what I was acquiring, through colleagues that I networked with and met through my time in the industry as well... Which - that's always my number one recommendation for anyone else considering an investment in the space, is just being comfortable with the sponsor, having trust in the sponsor, understanding who the sponsor is, and that you can rely on them.


Break: [00:14:12.09] to [00:16:10.19]


Joe Fairless: How did you gain that level of comfort competing with them if you weren't seeing behind the curtain on how well they're operating? What data points or proof points did you acquire to gain that level of being comfortable?


Bobby Larsen: Well, the reason I said quote-unquote competition is because in one scenario, they're competition, in another scenario they're the seller of a property that you're buying. So you keep a friendly relationship with them. And when they're selling a property, you can also get deep insight into how they operated that property that you're looking to buy; you see their management style, you see the good aspects and the bad aspects. I think that's probably the number one driver behind it. And then beyond that, it's really just the personal relationship that I had with the key decision-makers in that GP.


Joe Fairless: So for the other two groups that you're a limited partner with, both those groups would be categorized into this bucket, where you were familiar with them, you were competing with them, and perhaps buying properties from them with your other role? Right?


Bobby Larsen: Correct.


Joe Fairless: When you look at the operators prior to investing with them as a limited partner, what are some things that you want to make sure are in place before investing with them?


Bobby Larsen: Good question. I'll approach this assuming that I don't have personal relationships with any of the operators. So if I was looking at a new operator, and a new investment opportunity, some of the things that I would really focus on is a) do they have skin in the game as well, which is basically are they make an investment in this property? And is that investment in addition to what they are earning through acquisition fees or other fees that they're collecting for making investments? b) Do they have experience in this type of property, and not just multifamily? Their workforce housing - is it at least a strategy for new construction, or is it development? These are all very specific subcategories within the asset class, so you want to make sure that they have experience. And that's not just experience within their own general partnership, the properties that they own. It could be like myself, for instance, where they've been in the industry for 15 years and they know what they're doing, and they're building a portfolio themselves.


And then the third aspect - I just want to make sure that my investment strategy is aligned with their investment strategy. Am I looking for cash flow? Am I looking for total property appreciation? And what's the hold period? So I want to have an investment for 7 to 10 years where I'm getting some modest appreciation, as well as some strong cash flow... Those are all important dynamics. I think that's the three most that I would look at.


Joe Fairless: That makes sense, and I just want to ask what I didn't hear, and I wonder why... No right answer, obviously; it's however we individuals choose to make this decision. What I didn't hear would be waterfall structure, or preferred return, like the deal mechanics... Would not be after these three? Clearly, a consideration, but these three are, in your opinion, more important than that?


Bobby Larsen: I wouldn't say more important, because I could probably rattle off 10 to 15 different categories of what I think are extremely important, and that's where I would put waterfall structures to be. Now, I think that kind of falls into the trust category that I started off with. I think you need to have really strong trust with the sponsors you're going into. And with that in mind, if it's a group that I trust, I perhaps wouldn't even ask about the waterfall structure going into it, because for the most part, there's different structures, but they all have kind of a market norm of what is sensible and waterfall structure. Only a group that I wouldn't put in that trust category would throw out some abnormal, not-market terms in front of me, or some hidden fees I wouldn't expect.


Joe Fairless: I'm going to turn the tables now, and now from your general partner perspective, when a limited partner is speaking to you, and it's a first conversation you've had with him or her, and they don't know you, but they saw your logo in this interview that's taking place right now, and they reached out to you... How do you establish that trust so that they can then invest with you?


Bobby Larsen: Great question. I think track record and experience goes a long way in that process. Something I like to highlight is not just Vanamor's GP portfolio, but as well as just experience throughout my 15 years; there hasn't been a single property that I have been a part of, through the acquisition or the asset management, that has ever lost money. And that encompasses the financial crisis. So that says a lot. Now, I wouldn't even say that it's something that would strike out another sponsor, because if I was an investor looking to have the highest and greatest annual returns possible over a short period of time, it's inevitable that the sponsors that I'm talking to have probably lost some money. But it goes into, again, the aspect of having the general partner's investment strategy aligned with what the LP's investment strategy is. And once the same LP/GP investment strategy is aligned, it becomes a lot easier, and the trust is there to expect.


And it's not something that happens overnight. Typically, we have these conversations with an LP, and it could take easily a year or more going through deals, spending the time, walking them through, having them looking at each deal, before they get comfortable to actually pull the trigger and make an investment.


Joe Fairless: Do you have a certain process internally to keep investors in the loop on what you're doing? If so, can you talk to us about that marketing process, or that ongoing communication process that you have in place?


Bobby Larsen: Yeah, good question. Across all of our properties we have two main avenues of communication that we do both are on a quarterly basis, but each property receives a quarterly update that talks about the operation, the vacancy, the rent growth, as well as capital items that we're doing to improve the property from a value-add perspective. And there's a write-up for each specific property that an investor is in, that they receive every quarter, as well as there's a market update that we provide every quarter on an annual basis going forward, to provide our high-level sense of where the market is today, and where we think it's going.


And then above that, we always make ourselves available. So if an investor, regardless of the size of the investor, wants to call and talk about one of their existing investments, or just the market in general, we're available to make those calls.


Joe Fairless: So that is on -- at least the first part was regarding existing investors. But what about the investors who have not invested with you, but they're still on your email list? Do you have a process for keeping them in the loop, or do they also get these property updates? ...which I don't think they do... But do they also get these property updates and that's how you're educating them?


Bobby Larsen: Yeah, they don't receive the property updates, because there's some confidential information in there, but they do receive the market updates. I myself personally try to be very active on social media, specifically, LinkedIn. I think it's an amazing tool for the multifamily and real estate industry in general. And a number of them fit into that category where I probably talk to them, the non-LPs, but the prospective LP investors on a monthly or at least quarterly basis, and we talk about the deals we're seeing, and we talk about the market, and we just have follow-up phone calls pretty routinely.


Joe Fairless: You mentioned earlier no property that you've been a part of has ever lost money. That includes a financial crisis. Why do investors lose money in multifamily?


Bobby Larsen: I would say 90% of it, so excluding the bad boy players out there of sponsors that are doing something wrong--


Joe Fairless: The criminals.


Bobby Larsen: Yeah, the criminals out there, obviously. But within the industry, 90% of it is going to come down to your use of debt; that comes from both the leverage that you're using, as well as the debt maturity. I personally think it's really the debt maturity that gets most people in trouble... Because the shorter your debt maturity, the less you're able to withstand the market downturn. And that seems pretty intuitive, but if you look at the financial crisis, the markets that I've been in, which they are secondary markets mostly, and primary markets... So we need to exclude some of the tertiary markets out there that probably are an exception to this. But in the financial crisis, across my portfolio at that time, rents came down by 4%, which most people are shocked about; they think the financial crisis rents came down --like, property values came down 20% to 50%. And that just wasn't the case. So where people got in trouble is that what I referred to a lot actually in our quarterly update is liquidity in the market. Liquidity dried up in the market, and cap rates increased. So when the cap rates increase, that also means that the value of those properties came down, because there weren't as many buyers.


Well, if you don't have to sell at that time, you're fine, because your rents have only gone down 4%, so maybe your distributions are hit a little bit, but it's not material. It's the guys that need to either probably refinance their property because the debt's becoming due, or they need to sell it; they can't refinance it now, because liquidity has dried up, and there's not the same debt options out there... And they can't sell it now, because values are lower, and their equity is lower as well.


Joe Fairless: And knowing that's the thought process, what specifically do you do in terms of leverage and the length of loans that you put on your properties?


Bobby Larsen: Typically, the term that we like to put on our loans is somewhere between 7 and 10 years. Even if it's a value-add strategy, we prefer to not reduce our investment term. But we might go with variable debt, and a little bit higher leverage, but still pretty reasonable leverage. So our high leverage is probably typically around 70% to 75%. That's what we consider high leverage. It can go significantly higher. The bulk of our other investments, which we focus on more of a long-term strategy, 7-10 years, more focused on cashflow - our debt is typically around 60% to 65%. So because of that, our debt service is not too substantial. When rents go down, we're able to service it. And also, if we need to refinance our loan at a later date, we're able to, because we have a significant amount of equity from day one.


Joe Fairless: Taking a step back, what's your best real estate investing advice ever?


Bobby Larsen: The best real estate investing advice ever is to be adaptive, and look long-term. So markets continually change; no more so than today, real estate is considered a slow moving ship, for the most parts But you look at the market today, overnight, the market has changed. And we've gone from an extremely aggressive market to the opposite now. And it's important to take a step back, be reasonable with your assumptions, be conservative... And I wouldn't say put your foot on the brakes, because I think now actually is probably a better investment time than it was six months ago.


Joe Fairless: And why do you say that?


Bobby Larsen: Well, if you look at the market, the fundamentals haven't really changed. The fundamentals in the apartment industry are really strong; rent growth might come down from the extremely high levels that it was before, but that was unhealthy, it was unsustainable. So now rent growth is going to come down, but it's going to come down to a range that is historically still pretty strong. Occupancy is still very high, and depending on the market you're in, we're still under-supplied across most markets.

But at the same time, liquidity has dried up. Liquidity has affected both the debt markets, as well as people looking to buy real estate. So prices have come down. So when I look at it, I can buy the same properties, with the same strong fundamentals that were available three months ago, at a price of 10% to 20% lower than it was three months ago. That's a good opportunity. We try to take a contrarian view in a lot of what we do, and that goes to some of our markets too, but for the period of the second quarter of 2021 till about two months ago, we actually didn't buy a property for 12 months. And that was supposed to be a very rapidly-growing time period for us as a new company. But we were uncomfortable with the prices; not the fundamentals, but the prices of the market. So we didn't buy a property for 12 months. In the last month, we've acquired two properties.


Joe Fairless: We're gonna do a lightning round. Are you ready for the Best Ever lightning round?


Bobby Larsen: I'm ready.


Joe Fairless: Alright, what's your favorite part of the business?


Bobby Larsen: The relationship.


Joe Fairless: What's your least favorite part?


Bobby Larsen: The administrative work.


Joe Fairless: Best ever way you like to get back to the community?


Bobby Larsen: Always looking to give back, whether it's my time, or donations... Yesterday I gave back to an organization that's called The Seven Day Hero. They are a humanitarian aid foundation where they give food, resources and surgeries to third-world countries. I think that's very important today. And that's just the most recent one.


Joe Fairless: How can the Best Ever listeners learn more about what you're doing?


Bobby Larsen: Follow me on LinkedIn. I think that's the number one area where I'm spending most of my time. I make great relationships out there. I'm always available to connect with any of the listeners out there.


Joe Fairless: Bobby, grateful for our conversation, talking through your career trajectory, grad school, no grad school, talking about office, retail, and ultimately focusing our time on multifamily, how to assess opportunities and assess operators from an LP's perspective, and then flipping the table from a GP's perspective, okay, now how do we develop those relationships with our prospective limited partners to gain that trust and show our expertise? So thank you for the time today. Grateful, and hope you have a best ever day. Talk to you again soon.


Bobby Larsen: Thank you. As a longtime listener of the Best Ever podcast, it's great to finally be a guest.


Joe Fairless: Awesome!


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