How To Invest In Racehorses

Before it was the sport of kings, it was the sport of nomadic Bedouin desert tribes and of courageous chariot-driving Roman soldiers. Horse racing has been with us for thousands of years and, in many cultures and time periods, it has been an important part of refining bloodlines and defining breeds that are still with us today. As far as investments go, investing in racehorses could very well could be the investment adventure of a lifetime – exciting, exhilarating, thrilling.

Full of risk, including potentials for huge wins and devastating losses, investing in racehorses isn't for the faint of heart or light of purse, so make sure to do it only with money you can afford to lose. That said, there are several ways to invest in racehorses, and some of those ways do involve less risk than others. And, there's plenty of room for investors who aren't of royal blood, old money or the nouveau riche, investors who don't yet and may never count their discretionary income in millions.

Alternative investments are gaining the confidence of traditional investment advisers. Goldman Sachs portfolio strategy team senior strategist and managing director Theodore Enders is currently suggesting a 20 percent alternative investment allocation in a more traditional 60-40 investment portfolio. As a high risk alternative investment, however, investing in racehorses shouldn't form a significant part of your investment portfolio and is better kept as a smaller proportion of your alternative investments.

The best approach to investing in racehorses is to consider the investing to be as much a sport as the racing. Never bet the comfort and security of your retirement years on either, not on the investment or the races. Some count the adventure and excitement of the horse racing culture and lifestyle to be as valuable of an investment return, if not more so, as money itself.

Invest Time Before Money

The most successful investments, whether they're made on Wall Street or by the pasture gate, begin with investing time in learning. With horse racing, both as a sport and as a business, there's certainly a lot to learn before getting your money involved. The Thoroughbred Owners and Breeders Association, the Daily Racing Forum and the U.S. Trotting Association provide valuable information and educational resources for those new to the horse racing industry.

It's important to understand the costs involved in owning racehorses and being involved in horse racing before deciding to invest. Aside from the cost of the horse, there are the expenses associated with horse care and training, such as the cost of veterinary care, farrier services and professional trainers. These expenses can vary significantly according to region, race venue and the individual needs of a given horse. There will also be insurance, feed and stabling costs to consider.

Then, there are the costs associated with racing, including the fees associated with entering races, the expenses involved in transporting horses to events, and the purchase of specialized racing tack and other equipment. You'll probably be paying for a professional rider or, if your horse is a harness racer, a professional driver.

Naturally, win or lose, there are always tax matters to consider, such as the difference between standard income tax, which can take as much as 35 percent of your income, and capital gains tax, with a maximum rate of 15 percent. To be able to take advantage of the capital gains tax rate when selling a horse, the horse must be held for at least two years, although there are currently legislative efforts n motion to reduce that to one year.

The Thoroughbred Owners and Breeders Association recommends treating your racehorse investments like a business, particularly in regard to record keeping. Good record keeping can mean the difference between garnering a business or a hobbyist status from the Internal Revenue Service (IRS). That status impacts how and against what income you are allowed to deduct losses. In general, spending 500 actively involved, documentable hours per year will suffice for business status.

Buy A Racehorse, Watch It Run

There's a lot more to horse racing than the upper echelon of thoroughbred races that capture national and international headlines. In fact, there are multiple tiers of racing, including harness racing, featuring the more muscular standardbred horses instead of the finer built thoroughbreds. Multiple tiers of racing translates into multiple entry level price points and a wider range of opportunity than most people realize.

You don't have to be a millionaire to buy a racehorse, not to start out in the lower tiers and work your way up. Lower tier races are run at local fairs and regional racetracks, offering excellent opportunities to build the skills and experience needed to compete successfully in higher tier races. The purses may be smaller, but they still do serve to help to offset the expenses involved in buying, housing, training and racing a horse.

Depending on where you buy your horse, you can spend less than $10,000, far less if you're really lucky. In general, most people buy their racehorses at auction, via private sales or by attending a claiming race ready to buy. In a claiming race, all the horses running are for sale. You'll need to get a racing license to attend in most states. These races do have purses, but they go to the owners that entered the horses, not to the new buyers taking them home.

If the price of a racehorse is a bit out of your current investing league, you can buy in partnership with a few other buyers. You could also choose to further reduce your cost – and your risk exposure – by investing with a lot of other buyers, such as through a racing syndicate or new-school crowdfunding. You also have the option of reducing risk further by, instead of just buying shares in one horse, buying shares in multiple horses. Do note that current racing industry rules do require each person with a 5 percent or more stake in a horse to have a racing license.

Yep, There's A Fund For That

If you're looking at buying shares in multiple horses, you can, of course, do that individually. However, there are also specialized investment funds for that. You'll need to do your due diligence, checking win percentages, annual rate of return records, the quality of training staff and horse performance track records. However, horse racing, even when taking risk reduction steps, remains a high risk investment and past performance really can't guarantee future results.

Horse Flippers Earn That Return

Winning races isn't the only way that investing in racehorses can earn returns. There's money to be made in sales. A horse that is successful in lower tiers can catch the interest of a buyer that thinks that horse can perform well in the upper tiers, a buyer willing to pay an attractive price. Another sales based way to produce income is through what is called pinhooking. Pinhookers buy yearlings and invest in training them, entering them in races when they're old enough and selling them to individual buyers and racing syndicate investors.

Breeders Grow Their Potentials

Stud fees are a standard source of off-track income for many horse owners. Promising fillies are often bred in hopes of producing high potential foals. Breeding racehorses is another investment avenue for those interested in investing in racehorses. Larger operations often are built upon multiple streams of income, running some of their horses in races, doing some focused breeding and participating in the pinhook and stud markets. Like racehorses, sole proprietorship, small partnerships or buying shares are all common ways of investing.

Investing in an established breeding operation is likely to produce returns faster than starting one from scratch. However, when investing in racehorses, it is usually about more than just monetary return on investment. After all, there are plenty of safer, more reliable ways to grow your money. If you love the industry and the horses, getting involved with racing through breeding and training may be just right for you.

Know What You're Investing In

Whether you invest in racehorses via an investment fund or in ways that are far more hands-on, it's essential to understand what you are investing in. You're investing in the same dreams that the ancient Greeks had when entering their horses in the original Olympic games, the same joy in grace and beauty ancient Persians experienced watching their horses race through desert sands, and in the same fierce thrill the Mongols and the Huns felt as they raced the best of their horses across the steppes.

You're investing in a lifestyle, in the adventure you'll experience and friendships you'll build when you go from track to track, watching your horse run its races. You're also investing in the future of racing, not just in the horses that will run next week or next year, but also in those that will race a generation from now by investing in and participating in the industry today. The money you might make, that's just the sweet icing on one fascinating, delicious cake.