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.