From urbandictionary.com:
Someone was telling me that it’s a bad to say “vato” in the vicinity of or while addressing someone who looks like he’s from a Hispanic street gang, it’s not as bad as the N-word but close. Is this true, or is this guy full of day-old tamales?
I think you’ve been whoosed. Eddie Guerrero says it all the time on broadcast TV.
I’ve always taken the word as like using “man” in English. This is from Northern New Mexican Spaniards, not Mexicans. I’ve used it often with “odale” before I even knew any Spanish without any bad effects. 
AFAIK, “vato” is slang that translates to “guy” and doesn’t have a negative connotation.
WAG: Probably depends on context, intonation and audience.
But I’ve heard as well that “Vato” could elicit negative response from the Hispanic community.
“Homey” never got me in trouble with Chicago kids, but the LA hispanics I knew positively bristled at the term.
Maybe it’s simply seen as patronizing if it’s said by a non-hispanic. Imagine a dorky white guy coming up to a crowd of hispanic youths and saying, “Hey, mis amigos! Que Pasa with you?” or up to some black teens and saying, “Yo, homies! Word to your mother!”
I hear vato all the time, and I say it now and then when attempting to speak Spanish (or, more usually, Spanglish). Nobody seems to mind. And I’m the only non-Hispanic in my office.