Wondering about financing a herd expansion

[USMCshamusmom]

ways to get what you want without taking out a loan. Barter or trade, sell something else of value to get what you want. Work a second job, or two second jobs. ( I have) Start a small business in your home that is related to what you want to do (mini birthday parties, boarding for others, mini hayrides, mini horse lessons, gentling young ones, selling tack for minis, making neck sweats, leg wraps, halters, fuzzy nosebands, saddle blankets, stall nameplates, braiding fancy leadropes,customizing clothing or tack, etc etc etc) If your husband sells hay you already have built in contacts for so much of what you could do! Or doing something else you are good at.. raising home grown tomatoes, taking care of houseplants, dog sitting, child care, etc etc etc. Where there is a will there is a way, you would not believe the money I have raised from nothing when I have wanted something!

You are always smarter and more resourceful than your problem. You can imagine and dream and find a way to make it happen. The only limits are ones you are willing to put upon yourself. first define what you want, then set a goal, then set about thinking of a way to make it happen.

 

[chandab]

I have read with great interest the posts in this thread and see lots of knowledge among them.  I am considered a "big breeder" by most, but I feel like a small breeder because the horses are my obsession.  I have never borrowed money to buy horses, but I have bought many horses on payment plans and continue to help others by doing the same.  I have worked at the horses and reinvested almost everything that I have made with them back in them, and continue to do so.  When people ask me, "Why would you buy another horse when you have so many?", I respond that the business has been so good to me that I feel an obligation to reinvest in the business because I believe in it.  I brought home three new horses from the World Show, in fact!  LOL.  If I have the money available, I won't let a really good horse sell for an unrealistically low price, and would encourage other breeders to do the same.
I would advise you to buy the best that you can afford and if you love them and the business enough and work hard enough, you will be successful.  The best thing that you can do is to find a breeder who believes in you and who you trust to mentor you and help you to your goals.

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Also, wanted to say, I'm new to minis and would love to have a couple more, but it isn't in the finances at this time. I would never taken out a loan to buy a horse, too many things that could go wrong. I have one, possibly two full-size horses to sell; once that happens, then I can buy another mini or two. We have room for plenty of minis and put up our own hay, so that isn't an issue, but enough extra money is. Once, my 2-year old APHA filly sells, then I'll start looking seriously for another mini to add to my little herd. I don't ever plan to get real big, so I'm in no hurry to find another horse. Although, if just the right mini came my way, I might just have to figure out a way to buy it; whether on payments or other means.

 

[Mnmini]

Since I'm not absolutely sure of the purpose of your "herd expansion" I'll go ahead and relate what friends of mine have done to finance horse purchases. One is home equity (some credit unions/banks also offer auto equity), the second most common is a loan on their 401(k). I have used the latter (not for horse purchases), and find it is really a pretty good deal (unless the stock market goes gangbusters during the life of your loan, but that sure hasn't been the case the last few years), because essentially, you are taking out a loan on your money, and paying yourself back with a market rate of interest.

While financing a herd exapnsion for business purpose (as opposed to say buying a show animal to continue showing) wouldn't be my first choice, I would see nothing wrong with using financing to say upgrade to a better stallion. You would just have to be prepared that you couldn't necessarily look for any short-term return on your investment to make loan payments, and would instead need to be prepared for 3-5 years before you start to see any measurable return, as in from the sale of offspring. There is really nothing unique about the horse industry and the rest of ag when it comes to business expenses. Operating lines of credit are very common in the ag community, with the only major difference from equine, being most cattle loans (for example) with the cattle serving as collateral are based the market values of feeder/slaughter animals, and are generally cross collateralized with stored grain, equipment etc. Lenders have a much harder time substantiating values on horses, aside from published slaughter sale prices, so would probably need other readily marketable collateral to support such an operating line. Good luck.

 

[Jill]

Something else just occurred to me about running a business in general and staying profitable. Being successful in business (I own a business -- investment brokerage) has so much more to do with knowing how to run a business than being good at what you are in business to do. I have employees and even still get bogged down with administrative things that have little to do with investment planning and working with clients. You can be really good at whatever your activity is (horses, brick laying, financial planning -- whatever) but if you aren't good at running a business, you won't stay in business. I think trying to make a profit in horses and financing it has the potential to take something you love and turn it into a negative.

 

[Jill]

Since I'm not absolutely sure of the purpose of your "herd expansion" I'll go ahead and relate what friends of mine have done to finance horse purchases.  One is home equity (some credit unions/banks also offer auto equity), the second most common is a loan on their 401(k).  I have used the latter (not for horse purchases), and find it is really a pretty good deal (unless the stock market goes gangbusters during the life of your loan, but that sure hasn't been the case the last few years), because essentially, you are taking out a loan on your money, and paying yourself back with a market rate of interest.
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There is one negative with what you are discribing that most people are not aware of, even if they have borrowed and re-payed into a 401k. You put the money in pre-tax. Then if you take it and re-pay the loan, you do so with after tax dollars. These days too many people use their 401k's like ATMs. More often than not, when we do business with a client who does not fit our idea model in terms of investable assets, they end up running through their IRA's (that they roll their 401k into) for things that are just not financially smart.

 

[Mnmini]

Since I'm not absolutely sure of the purpose of your "herd expansion" I'll go ahead and relate what friends of mine have done to finance horse purchases.  One is home equity (some credit unions/banks also offer auto equity), the second most common is a loan on their 401(k).  I have used the latter (not for horse purchases), and find it is really a pretty good deal (unless the stock market goes gangbusters during the life of your loan, but that sure hasn't been the case the last few years), because essentially, you are taking out a loan on your money, and paying yourself back with a market rate of interest.
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There is one negative with what you are discribing that most people are not aware of, even if they have borrowed and re-payed into a 401k. You put the money in pre-tax. Then if you take it and re-pay the loan, you do so with after tax dollars. These days too many people use their 401k's like ATMs. More often than not, when we do business with a client who does not fit our idea model in terms of investable assets, they end up running through their IRA's (that they roll their 401k into) for things that are just not financially smart.

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I'm not sure what scenario you would be referring to where folks would roll a 401(k) into an IRA, and then liquidate the whole shooting match, unless they have left employment, and do not have the option of leaving their accounts open? They're not vested? Perhaps you can explain that one in a little more detail. True, you are repaying the loan to yourself with after tax dollars, but then again, you would be doing that with any loan. I think I know where you are going with this argument, but for most people, assuming you aren't reducing your 401(k) contributions during the life of the loan, and unless the market for your particular funds are making huge gains for which your "borrowed" funds are no longer there to enjoy, the "cost" associated with this form of financing is still a good alternative to traditional forms of financing for unconventional needs (ie, the purchase of a show animal, fees/expenses associated with an international adoption, or for many folks the elimination of revolving debt). For some periods, if I hadn't had a loan to repay to myself, I wouldn't have had any "gains" at all on my funds, lol. I know for my own 401(k)s I can only have one loan outstanding in either of them at any one time, and can only borrow so much of my contributions, and none that my employer matches, so not quite the freedom (excluding the tax ramifications of course) of simply liquidating an IRA, ha. Would I recommend a 401(k) loan for something the lending market already covers competitively like real estate, autos, etc., no. Obviously, whether this type of loan is a good idea, depends on the loan purpose, the availability/cost of more tradtional financing, and really where you are (ie, are you retiring in the near future, versus having many years left to contribute/absorb market fluctuations while some of your investment is tied up in what might end up being a low rate of return.

 

[Jill]

It really is not financially smart even if you repay quickly because you are cheating yourself out of the tax deduction.

This article explains it in easy-to-understand terms. It's too hard to explain it in type and do as good a job as this article.

The full article is here: http://moneycentral.msn.com/articles/retire/basics/4714.asp

but I am going to cut and paste the piece that describes what I am referring to:

It's not tax-sheltered money anymore. Whether you repay the 401(k) loan out of your salary or from a bank account, those payments are all made back into the 401(k) with after-tax dollars. So, let's say your monthly interest payment is $300 and you're in the 28% tax bracket. You'll have to make $416 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes yet again.

 

[Jill]

Also, I probably shouldn't have mentioned the IRA's. That just confused the issue and didn't have anything to do with this really. You cannot borrow from an IRA anymore. Yes, the people I work with for the most part are already retired and they roll their 401(k) or 403(b) into an IRA, which is usually very smart. It opens up the world of investment options to them. There are some reasons NOT to do this, for example, some 401(k) allows a participant to begin withdrawals at 55 for early separation. But if not, then setting up your own IRA is a non taxable event and lets you decide where to invest your money rather than being limited to what the 401(k) offers. Plus, many plans require the money to be moved at some time after employment ends.

NOTE: if you do take early money from an IRA, the tax is due as is a 10% penalty if you are not yet 59 1/2 or do not do it as a structured payout over 5 years (you get locked into the money coming out, and the taxes -- it pays to talk to an advisor because their are options you probably are not aware of.

And, yeah, I know that I am a nerd!

 

[Margaret]

I also have seen the enthusiam to expand in miniatures too quickly to cause people to fold in more ways than one. Unexpected vet bills, finantial strain, and even divorce has happened close to me. Start slowly,with a small number, and dont follow the trend to buy big.. See first if there is any success with a small number..That will give you an indication if any more will be the right move.

 

[Mnmini]

It really is not financially smart even if you repay quickly because you are cheating yourself out of the tax deduction.
This article explains it in easy-to-understand terms.  It's too hard to explain it in type and do as good a job as this article.

The full article is here:  http://moneycentral.msn.com/articles/retire/basics/4714.asp

but I am going to cut and paste the piece that describes what I am referring to:

It's not tax-sheltered money anymore. Whether you repay the 401(k) loan out of your salary or from a bank account, those payments are all made back into the 401(k) with after-tax dollars. So, let's say your monthly interest payment is $300 and you're in the 28% tax bracket. You'll have to make $416 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes yet again.

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Read the article, which is pretty much where I thought you were going with it, and mostly what I had stated above as drawbacks. The article example of $300 a month in INTERST payments, versus gross pay of $416 to make said payment, would have to be a pretty exteme example. Because, the article is correct. Most funds have a limit of 1/2 your vested amount or max of 50,000. Using $50,000, I would have to borrow the full amount, at 13% to have $300 a month in interest payment. If I had to pay rates like that, quite obviously there are less expensive options, heck many credit cards can beat that rate. I also "get" the concept that I'm repaying the loan with after tax dollars, but that argument really only flies if you're talking about taking a 401(k) loan versus not taking out a loan at all. And, really only has a measurable impact if you are meeting both criteria, ie. you're in the 28% tax bracket, AND your're borrowing significantly from your fund(s). If you need the loan, you're going to be making that payment with after tax dollars regardless, though you might qualify to deduct the interest on a home equity, and with the "gains" on many 401(k) funds the past few years, your "lost" opportunities haven't amounted to a hill of beans. I'm not trying to be arugmentative, and certainly have nothing to gain or lose by folks using one financing method over another. Cheers.

 

[Jill]

Everyone needs to make choices for themselves. This is just one of the few areas I am actually pretty knowledgable about and wanted people to have information to make an informed choice. I didn't think you were trying to be argumentative and I'm not either. And, it does not matter if the payments are of interest or principal, the tax implications are identical... Would it surprise you to know that the name of my corporation is Investment & Tax Strategies, Inc.

 

[Jill]

You know what? I just thought of something. I still personally wouldn't be in favor of borrowing from a 401(k), and I do not think many people who think they will make a profit in horses ever actually do, BUT if you were setting the horses up as a business, borrowed money from your 401(k) and deducted the horse purchase on your Schedule C (or whatever), then maybe the tax consequences would be neutral (?). I don't really know but I think there's an opportunity there. Still, I am going to keep pursuing my horse stuff as a hobby with hopefully some stud fees and maybe sales to offset SOME the money I'm spending towards the hobby.

 

[mountain_waif]

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[kaykay]

Lois

I have to really disagree with your statement. I depreciate my horses every year for 7 years (this is what i chose on my schedule C) For example i can buy a horse on Dec 31st and claim it on my 2005 schedule C for depreciation. This goes against your total sales and costs of doing business. So you do get to deduct your horses. I also take a depreciation deduction on my tractor and trailer. On a sad note but realistic -- i had a horse die the same year i bought it and it wasnt insured. Her total purchase price was 100 percent deductible.

Kay

 

[Tammie-C_Spots]

I started in minis in 1992. Over the years I did take out a few personal loans to buy a particular horse and paid it off within a year. After a few years I upgraded all my stock and now do that on a regular basis. I don't breed/buy/sell for the market but for what I like- luckily others seem to like them too because the minis have pretty much been able to pay for thier care/upkeep year to year with a small bit of profit some years. I have six at home and have leased out three at this time. Our 2006 foals already have deposits on them with people waiting to see if we will take deposits on the 2007 foals. I have a passion for horses and I really enjoy all that is involved in having them. I care for them myself with my husband's help on occation. Would I take out a loan to buy a bunch more to "expand"- I don't think I would. Right now I have everything "fine-tuned" from my location and the market available to the number of horses I can care for myself without feeling overwhelmed. Would I take out a loan to buy another horse?- I would if I couldn't do time payments but I'd want that loan paid off in a year and with minimal interest. These days most everyone does time payments so that would be my first option.

Tammie

forgot to note that we haven't run as a business since 1996. We are a hobby

 

[Margo_C-T]

Just curious-for those who are doing their horses as a business-why would you be using a Schedule C instead of a Schedule F?

 

[horsehug]

Margo,

What is a Schedule F?

We have had our taxes done by a professional ever since we started our horse business, and actually the first person who did them specialized in horse businesses. When she retired, her daughter in law started doing them for us.

They have always done an excellent job for us and very reasonably, and use a Schedule C.

But I am curious what the Schdule F is and why it might be a better option?

Susan O.

 

[rabbitsfizz]

I would take out a loan to buy land, this will always be there and always have a set value. Even if the market were to crash again, the land would eventually come back to it's value and is a sound investment. I would NEVER take a loan to buy livestock, unless it was a credit card loan, that I could pay back as and when I wanted. There is no way I can see to make money on horses, unless you were to enter at virtually the top level and throw a real amount of money in and sell at inflated prices- I am not willing to do this and I cannot stand "hype". The other way to make as oppose to lose, money is to go steady and sure, as I have done, and only have/breed what you actually want yourself. That way you are never disappointed. I only show what I have bred myself, usually, now , for five generations. I take great personal satisfaction in that, I break even, some years I even make something!! Over here the tax laws are so complicated it is not even worth considering registering as a business- far too many questions, and too many people would then know my business!!

 

[Marnie]

I guess I'm the odd ball here. Over the years, I've taken out quite a few loans to buy a better horse or one that I really wanted to ad to my herd. The most I've ever taken was $3500 and on a 6 month note from my banker. I just call it my "horsie loan" and he gives me what I want. I pay it back with my baby sales or however I can and if I don't get it paid off in 6 months, I just renew it for another 6 and get it paid. I've never taken a 2nd one though, until this ones paid off. If I'm pretty broke and a sales coming up, I've even called my friendly banker, just to verify that, Yes, I can get another loan if I want it. I haven't taken any in the last yr because I'm not in the buying mode lately but if I wanted to buy a horse that I didn't have the cash for, I'd feel fine with calling him for another fast "horsie loan." I read through this thread and am surprised that not many people would do this way of buying. For me, I'd have the cash and not find the horse I want but if I found the horse I want, the cash woudln't be here. I find that when I'm looking for a particular horse, I can't find it. I find it when I'm broke, it happens every time. So I love my banker, Berry, he's my buddy.

 

[mountain_waif]

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