Editor's note: This article is Part 1 of a two-part lesson on purchasing your own horse farm. See also: Part 2, "Understanding the Money Game", , describing the finances behind your horse farm and writing a real business plan.

Most of us have fantasized of having our own horse facility and considered all of the positive aspects of having our horses under our own care. Yet, the legal and financial implications are often overlooked as we dream of perfectly laid out stalls, efficient watering systems, and acres of grass pasture. The dream often gets put ahead of the reality, i.e. we put the proverbial cart before the horse! Here are some things you need to consider before you even start designing that new barn in your head.

The ABC's of Equine Real Estate
Although boarding and breeding farms are businesses by their very nature, they usually all have something in common — a residence on the property. The very existence of this residence categorizes the property as real estate, yet most residential mortgage brokers won't lend money for them. That's because they're often classified as commercial. If a property is zoned agricultural, agricultural/commercial, or is filed under certain land laws of some states, it's no longer qualified for a typical residential mortgage.

If the property is comprised of too many acres of land (usually over 5) or the barn has too many stalls (usually over 6), it may be disqualified by mortgage lenders even if it's zoned residential. The reason for this is because the appraiser views too much land or too many stalls as "added value". This means there is additional value in the property to you as the prospective buyer beyond that of just a residence to live in.

Banks believe that anything with additional value is not conventional for residential mortgages. They consider these types of properties to be commercial because they have the potential to earn income from that added value. Whether or not you plan to utilize the land or stall space for income is irrelevant to the bank. The earning potential is there and that's all that matters to them. When looking at any property, you should educate yourself as to local zoning requirements and how the property will be appraised so you know what type of loan you'll need to apply for.

What matters most to you?
Like any horse owner, we all have personal priorities as to what matters most to us and that usually depends on the needs of the horses we already own. Are your horses more for pleasure or for showing? Your pleasure horses are no less important than expensive show animals, but be realistic. If you've never given your horse a bath in all the time you've owned him, then how important is a wash stall going to be to you?

Start by making a list of YOUR horse priorities. Then, make a list of the amenities you think a prospective boarder will look for in your facility. If you have pleasure horses and want to attract other pleasure horse owners, it's possible the two lists will look much the same. But, maybe you're a trainer who used to be a high profile rider and miss the excitement and energy of a show barn atmosphere. In this case, you may list additional items you want your farm to have to attract the same type of boarder. Compare the lists in either case and note where they overlap. The items listed on both lists are "must-haves" for your new farm. Don't waste your time even viewing properties that don't have those "must haves"! If a turn out is the number one must-have on both lists, don't waste your time looking at properties with insufficient usable acreage to support the number of stalls that are housed there.

Now, review your lists again. Separate those items you think are attractive to boarders that you didn't have on your personal list. Then rank them. Ask other horses owners (of the same target market) to rank them too. Find out what people want most. For most buyers, the farms that offer every bell and whistle are usually out of their price range. You will need to weigh what you are willing to pay more for up front now versus what can possibly be added later. This is all part of your initial market research and the data will come in handy later if/when you need to write an initial business plan.

Is This Financially Viable?
Once you find a property with potential, you still have more number crunching ahead of you. This is NOT a hobby, but a Business! It needs to make money to survive and for you to live on. There's an interesting Catch-22 in the banking industry when it comes to loaning money on a new business. Banks want solid, historical financial data to feel comfortable loaning their money to you, which requires you to produce a 5 year cash flow projection in your business plan — do you see the irony? How do you PROJECT an income and expense flow off of a farm you don't even own yet? Fortunately, it's not as impossible as it initially may seem.

If you already own horses, you know what it costs to care for them. If you don't, prices for grain, hay, and other needed items are just a phone call away to your local feed store. Make a list of all your estimated expenses, from electricity to shavings, which are needed to support horses on the property. By spending one day making phone calls, you can probably gather all of the information you need.

You'll use averages for each horse. We know every horse eats a slightly different amount of food and may require different care, but take an overall average. For example, most books on horse care will state statistics already gathered from hard data on how many pounds of hay per pound of horse is needed by each horse per day and how many gallons of water per day they drink. By basing your projected expenses on concrete data, you'll add credibility to your business plan. Make all of your projections as monthly numbers assuming 30 days per month. If you get annual insurance estimates from your local agent, divide these annual numbers by 12 to get your monthly costs. Even though some expenses, such as taxes may come semi-annually, the bank expects that you'll convert these expenses to monthly costs in order to determine your monthly revenue needs and to get a complete view of your business over a full year.

Once you feel you have all of your monthly costs, you can set up a simple spreadsheet with a few formulas to calculate your break-even point — this is called a break-even analysis. All your estimated values will be adjustable so you can update the spreadsheet as prices change and as you experiment with different numbers of boarded horses. This is important because you can't base affordability on the expectation of always having a full barn.

For example, if you have capacity for boarding 20 horses, you may want to first assume just 10 horses and enter a boarding price that is competitive for the market you're in. If 10 horses at $500/month results in a loss each month, you can raise your board price or increase the number of boarders on your spreadsheet. When your revenues coming in equal your expenses going out, you've reached "break-even". You could find that it takes 18 horses at $600 per month to break even. In this case, you may have to consider a less expensive property. You can't assume you'll always be at full or near full capacity and you also can't price yourself out of the market. The more breathing room you have with low break even numbers, the more comfortable the bank (and you) will be.

Now you've had a chance to review some of the key steps you should follow when embarking on the journey to fulfill your dream. And, it is a journey! You can expect the entire process to take about a year or more. Searching for the "right" property takes time; you may not be able to find such a property when you first begin searching. The, commercial loans can take 90-120 days minimum to close from date of application. This is much longer than a residential mortgage which often only takes about 30 days to complete. Even the process of applying for a commercial loan can be several weeks or months while you wait for approval. But don't be disheartened by the process. The more research, "what ifs" and planning you do up front, the better you'll understand your cash flow needs and the better you'll be prepared to make this a smooth, satisfying process that will benefit you and your business for years to come.

Jennifer Goddard has been training horses of various breeds for over 20 years using her natural horsemanship methods. She has also ridden and shown in multiple disciplines and is owner of Levaland Farm, a 30 stall horse farm in Massachusetts. Jennifer has a degree in Finance and Entrepreneurial Studies from Babson College, and is also President of Equine Business Solutions, a business specializing in the starting and running of equine businesses.