Place bets on racehorse investing

The returns from buying racehorses come primarily from the thrill of winning. It’s an investment driven by passion; with profit an occasional by-product.

If people don’t love the sport, the financial uncertainty will wear them down, says Barry Irwin, CEO of Team Valor, a Lawrenceburg, KY-based stable that runs thoroughbreds at major racing venues in the U.S. and abroad.

“Investing in racehorses is pure indulgence,” he says. “It’s more akin to spending than investing.”

Dan Metzger, president, Thoroughbred Owners and Breeders Association, in Lexington, KY, says “the game runs from people who invest a couple thousand dollars to people who invest hundreds of millions.”

Investors must gain enough satisfaction from the few highs to tolerate the many lows, he adds. So, due diligence is paramount. Form a team of experts that includes appraisers and trainers.

Metzger recommends meeting with bloodstock agents (brokers who liaise with horse owners, auction houses and private sellers), horse trainers, pedigree experts, legal experts to negotiate partnership agreements between co-owners and handle contract disputes, and tax experts to help with investment credits.

“Horse racing is classified as farming in Canada,” says Catherine E. Willson, an equine law expert at Willson Lewis LLP in Toronto. “There are considerable financial incentives in Canada to race and breed Canadian horses.”

Investors can deduct all business losses against other income, but if racing is a secondary business, investors are limited to deducting $8,750 of business losses against other income.

Unless someone owns at least 10 horses, a business plan is not required; a budget of income and expenses should suffice. Even then, “horses are unpredictable, prone toward injury and rarely follow scripts. One has to be able to roll with the punches and make financial adjustments along the way,” he says.

What to look for

When purchasing, Irwin’s must-haves are talent, then stride, conformation (the correctness of a horse’s bone structure, musculature, and body proportions) and pedigree. Bloodstock agents and auction companies will appraise horses for a few hundred bucks, he says.

“I then assess [if the] horse can be developed into one capable of winning at the highest level,” he adds. “Finally, I have a veterinarian examine the horse.” These examinations include radiographs, ultrasound scans of soft tissue, endoscopic examination of the throat and an inspection of other body parts.

As for the asking price, “[When] the general economy is down, prices for quality racehorses skyrocket, [because] wealthy people haven’t been adversely impacted by the economic slowdown to a great degree and the supply of horses is down,” says Irwin.

That’s because owners either sell their retired female racehorses, known as broodmares, or don’t breed them at all to save money. “What’s left is a smaller number of unraced stock, which in many cases represent the best mares.”

And beware of bidding wars.

“You may think a horse is worth $100,000, but unless you have at least two people bidding on it, [it may only] bring $60,000,” adds Metzger.

If the price is too high, investors can form partnerships—a sort of thoroughbred timeshare. “In the initial quarter of 2012, I formed three: one for $125,000, another for $360,000 and one for $1.25 million,” says Irwin. “Our investors typically own 5%-to-10% of an animal. We sold investments [ranging from] $6,250 to $125,000 [each].”

And don’t let clients bet nest eggs.

“They should set aside an amount they feel comfortable losing,” he says. “I tell my customers, ‘Kiss that money goodbye, because chances are you’re only going to see a fraction of it ever again.’

“A famous trainer once described horses as being like strawberries—they can spoil overnight.”

A horse’s earning power peaks at age three. Top horses can remain productive up to ages five or seven. Then it all goes downhill.

“If horses have problems, it costs money to keep rehabilitating them, and their earning powers are severely limited,” says Irwin.

Investors can also profit by selling broodmares for breeding. Male horses, on the other hand, have to earn their keep on the racetrack and are usually worthless when they retire, save stallions that can be used for breeding.

Facts and Figures

• 14,023: horses sold in North America in 2011
• $728 million: gross sales from horses sold in North America in 2011
• 4,376: number of races in Canada in 2011
• $117 million: gross purse of races in Canada in 2011
• 45,418: total number of races in the U.S. in 2011
• $1.06 billion: gross purse of races in the U.S. in 2011
• $16 million: world-record price paid in a 2006 Florida auction for The Green Monkey, an American thoroughbred racehorse

All figures in U.S. funds.

Sources: www.Jockeyclub.com, Thoroughbred Owners and breeders Association, Team Valor

Thoroughbreds are more prized than harness horses, or standardbreds, because thoroughbred racing is more prestigious among betters, built up over more than 250 seasons throughout the world.

Irwin has bought thoroughbreds for over $2 million as yearlings—one-year old untrained, unsaddled horses—and has sold some for more than $6 million.

“Racing is an art, not a science,” he says. “People with horsemanship on their sides, win.”

Hassle factor

When something bothers horses, it’s difficult to read their body language. Many things can turn them into liabilities overnight.

• Uncertainty: Inexpensive horses have turned out to be tremendous racers, while some bought for millions turn into busts.
• Injury: Racing is dangerous. Horses get injured, or worse, die.
• Training: The training bill for a horse could be $50 to $60 a day if trained on lower-end tracks and $100 to $120 a day on higher-end tracks.
• Maintenance: This includes feeding the horse, grooming, monthly vet bills, hiring a farrier (someone who shoes horses), and could cost from $25,000 to $50,000 a year. In cold weather, most horses will eat 2%-to-2.5% of their body weight in hay per day, says the Ontario Ministry of Agriculture, Food and Rural Affairs. So a 600-kg (1,320- lb) horse will eat 12-to-15 kg (26-to-33 lbs) per day, or half a 65-lb square bale.