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A recent Forbes article states that you can invest in horses and livestock in an IRA.

you can also invest in the following:
- real estate
- farm land
- horses and livestock
- water rights
- physical gold, cryptocurrencies, tax liens, private mortgages, and more.

Horses can't appreciate in value indefinitely because they get old and die. There are maintenance costs such as stables, horse food, veterinary care, and training, which I assume must be paid out of the IRA similar to the rules for real estate. So how do horses produce income or appreciate enough in the short term to make it worth holding a horse as an investment?

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    You can simply let them multiply themselves and sell the offspring. – HarryH Jul 18 '18 at 8:25
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    Old joke: "How do you make a small fortune in horses?" Answer: "Start with a large one." (A "large fortune" that is!) As the answers have pointed out there are certainly ways to make money investing in horses, but you do have the right idea in mind that it's hard to do. – Draco18s Jul 18 '18 at 14:47
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    Easy. Just win the triple crown. – Harper Jul 18 '18 at 16:04
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    @Michael I'm certain Harper was joking.. – ell Jul 18 '18 at 17:24
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    @BobJarvis While true, horses are a particularly difficult investment to get right. They're almost literally only valuable for about 5 years, race horses potentially less so (as the public has become enamored with the Triple Crown, which is a race for two year olds, whereas horses aren't mature until at least five!) as it is very easy for them to become injured. Even your "average horse" is only one meal away from life-threatening colic (horses can't throw up; vomiting being the typical autonomic response to any bad food). – Draco18s Jul 19 '18 at 14:43
72

The ROI on a racing stallion can be astronomical. American Pharoah's stud fee started at $200k per live breeding (and they can breed a tremendous number of times each season). Dressage, polo, rodeo, any equestrian sport will create demand (and therefore potential ROI) for horses that perform well. Typically the winnings during their career are dwarfed by their breeding revenue.

Similarly, top bulls command large sums for breeding.

Not a traditional investment, but that's part of the draw of a self-directed IRA for the very wealthy.

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    This makes sense. If a female horse is bred, the offspring could be sold. If the mother is owned in an IRA, is the offspring in the IRA and would revenue from the sale go into the IRA? – Pacman Jul 18 '18 at 2:01
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    @Pacman Any number of investment scenarios could be arranged, but most likely you'd invest in a farm/stable as a whole and reap a portion of the profits, if any, as dividends or just benefit from the increased value of the farm/stable as a whole over time. – Hart CO Jul 18 '18 at 3:57
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    One caution @Pacman is that since the horse is in an IRA, one must be careful to not make any withdrawals from the IRA. For example, historically, taking pleasure rides on your horse is considered a dividend pulled from the IRA. – Lan Jul 18 '18 at 12:26
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    As an investment, how does this compare to directly betting the same money on horse races? – HAEM Jul 20 '18 at 12:15
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    @Lan I'm honestly not sure if you're joking or not... – Stack Tracer Jul 21 '18 at 17:58
35

Horses can generate income from winning horse races. The owner of the winner of the 2018 Kentucky Derby took home $1.24 million while second place received $400,000.

Horses can be put out to stud, especially if they have won lots of races. Top stallions that are not racing thoroughbreds may command $20,000 for one breeding, racing thoroughbreds will be worth significantly more. Back in 2002 it was estimated that the Rock of Gibraltar might generate $10 million annually from 3 years at stud.

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    Is there a typo in the quantity in "Top stallions may command $20,000 for one breeding" - it seems at odds with your previous sentence and the figure quoted by Hart CO... – Chris Jul 18 '18 at 11:10
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    Ah, ok. So the 20,000 is a more typical "top fee" for a good stallion that isn't literally the best in the world? That makes more sense now. I was a bit confused going from "several hundred thousand" to "tens of thousands" in adjacent sentences. :) – Chris Jul 18 '18 at 11:18
  • @Chris From the horse-breeding wikipedia entry it says top stallions in other disciplines (not racing thoroughbreds) may command up to $20k. That distinction would clear up the wording confusion. – Hart CO Jul 19 '18 at 14:34
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    @HartCO hopefully my most recent edit has injected more clarity. – Robert Longson Jul 19 '18 at 14:36
19

To add to the other answers, a focus on the breeding and maintenance side.

It's very difficult to make money in horses. There's a couple of ways high end breeders maximise income.

  1. For breeding from mares, surrogate breeding schemes that utilise embryo implantation into surrogate mares, increases the number of foals born to champion mares. Champion from their breeding, or work in racing, showjumping, dressage and the like. (note not all breed associations allow surrogacy if you want to register the horse)

  2. For stallions it's been common to sell stallions as a stud horse, whether by the old fashioned way of bringing the mare and stallion together, but also with artificial insemination, sperm is able to travel the world. (note not all breed associations allow artificial insemination if you want to register the horse)

In terms of procuring a horse in the hopes of having a winner at the track, the chances of making money are slim.

Attempting to make money out of horses is one thing I would advise 99.999999% of people from doing. Horses take great expense to upkeep. With the following:

  • agistment Large variation - in the city from $80 - $250 per week where we live, cheaper in country areas. If you own your own property $$++ Fencing and shelters are uber expensive.
  • hard feed required at least once daily for horses in work, in foal, feeding foal, foals, weanlings, yearlings, older horses, horses that are not "good doers" Prices vary with the weather e.g. drought, flood. One 20 kg bag of horses feed varies between $17 and $48 where I live. I currently feed approx 25 kg of hard feed per day for 7 horses.
  • hay essential for any horse without unlimited good pasture. At least daily. Prices vary with the weather e.g. drought, flood. One bale of lucerne or oaten hay varies between $10 (if you can buy 650kg bales) to $25 a small bale. Each horse could eat between 1/10 to 1/2 a small bale per day depending on pasture, hard feed and needs.
  • Supplements (as soils vary and sometimes feed and pasture is lacking) Approx $100 per package - one package per month
  • worming between $12-40 per packet, variable timing
  • vaccinations $42 per vaccine, if I vaccinate myself (not vet). Each unvaccinated horse needs 3 vaccines to begin and then boosters.
  • hoof care bare foot trimmer $45 per horse, farrier $50+ per horses
  • teeth care approx $100 per horse per annum or 6 months
  • vet care as needed $++
  • skin and coat care To detangle tails, prevent rain scald and attend to various itches $29 per spray bottle - always need various sprays
  • tack (gear to handle and ride the horse) $1000s halters, lead ropes, rugs if needed, saddles, saddle cloths, grooming kits.
  • Feeding bowls and storage for feed and tack Continually need to be replaced.
  • Trainer, groom and rider (if the horse is an investment, likely employ a third party) Very expensive, as horses are time consuming.

Horses are strong and prone to breaking things or injuring themselves if the set up is inadequate.

An example. My mare recently foaled. The cost of the vet bills to attend to that foal (as there were complications) is $3000. I spend between $20-30,000 per annum on my horses (7 of them).

Unless you have high end expensive horses there's no money to be made. This causes shonky dealers and breeders to cut corners with the horse care. These are sentient creatures and are a responsibility, although considered a commodity, this is something that needs to change.

In Australia, our racing industry has thousands of horses each year discarded in sales, as breeders strive to make money and most of the horses fail. The RSPCA is starting to tighten industry standards to try and track and put in controls for retired race horses.

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    Just for fun I calculated this and you are actually advising that 3 people in the United States and 76 worldwide attempt to make money out of horses. Also 1/4 of a person in Australia... :-) – Michael Jul 18 '18 at 17:20
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    @Michael yep I'd be happy with that. I've seen too much of the other end of what happens to horses when they're too old to breed or perform. Also many of the sporting activities humans use horses for are cruel and for the enjoyment of the people not the horses. – user39621 Jul 18 '18 at 17:38
  • For responsible horse owners, add retirement care. My riding instructor has a couple of horses that are too old to be ridden, except in the arena by an extremely light-weight rider, but that she considers entitled to maintained in comfort as long as they seem to be enjoying life. That means feed, vet care as needed, hoof care (trim or shoes as appropriate), grooming, and affectionate attention. – Patricia Shanahan Jul 24 '18 at 12:11
  • @PatriciaShanahan yes. that is a relevant point. I don't know how I could forget that people dump their horses when they're old. – user39621 Jul 24 '18 at 12:12
4

I think the inclusion of horses along with livestock is similar to the inclusion of farm land separate from real estate. An investment in horses and livestock would be the largest portion of getting established in ranching (assuming there are local open ranges). While horses have been made obsolete in field farming they are still a major part of most modern ranches.

These aspects of the IRA rules would be more about allowing a person to get set up in ranching using IRA savings than they would be about these items being an investment vehicle for a passive investor.

  • I really wish I could upvote this answer more than once. – quid Jul 19 '18 at 18:35
3

Breeding fees and selling. You are right if you don't have a horse earning (breeding fees) and you hold on to it for too long, then you will lose money for sure!

With the cost of training and keeping a race horse, and the number of people who get a split of the prize (jockey, trainer, etc.), and the TAXES, I would be amazed if the Kentucky Derby winner actually made a profit worth writing home about from prize money. Not to mention the uncertainty of actually winning the race. The horse most predicted to win the Derby ever was Bimelech in 1940 who went to the gate at 0.40-1 (basically around 2/3 chance of winning, if I've done my math right)...and still lost. https://www.kentuckyderby.com/horses/news/5-fast-facts-kentucky-derby-shortest-priced-beaten-favorites

Tying into that, historically the big growth investment has been "art" horses. The, um, benefit to "art" horses over sport horses as an investment is that a sport horse has a quantifiable metric for performance: if you have a race horse who turns out to be slow, everyone can tell and you're not going to be able to sell him for much or charge a high stud fee. If you have an art horse the value is subjective, and the only limit is your marketing ability.

In particular, Arabian horses has a huge investment boom and bust in the 1980s that was similar to the tulip crazy boom/bust. There were some favorable tax laws at the time for putting money into "art" objects (including "living art" horses), but the real money was the people who were convincing other people that it was a good investment and selling them over-priced horses. Some people made money buying early in the boom and selling, or buying and re-selling with better marketing skills, but the people who owned the horses when the tax laws changed and they were no longer marketable lost big time (as did the honest breeders who didn't want to see horses thrown away and bought them back). So the special knowledge that would make that kind of situation profitable would be being able to sell the horse on, and maybe having some intuition that the tax situation wouldn't last forever so that you could get out at the top instead of the bottom... https://www.chronofhorse.com/forum/forum/discussion-forums/off-course/81839-arabian-horses-in-the-1980s

1

You can also buy a horse on prospect (untried racing colt) and then resell when the price appreciates (due to good showing).

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