Herd Mentality
Many dot-com entrepreneurs, media executives and celebrities have bought so-called “trophy ranches” in recent years. Typically costing $10 million to $20 million, these have been selling briskly in prime cattle country in Texas, western Colorado, Montana and Wyoming. Their owners often use them as private retreats and indulge in fishing, hunting, hiking and horseback riding.

Some would-be ranchers, blinded by the blue-ribbon rivers, pristine mountains and abundant wildlife, fail to realize that riding the range carries a steep price tag, both in terms of ongoing capital requirements, and effort. “Operating a 10,000-acre ranch takes many employees and equipment,” says Billy Long, a partner with Ranch Marketing Associates in Aspen, Colo. “And it’s ongoing. Realizing the negative impact is a challenge.”

Many of us are also unprepared for the lifestyle. Ranching is a lonely life. In rural states like Montana, which boasts a population of only 900,000, services are sparse. The nearest grocery store may be hours away. “There aren’t many Starbucks in town,” quips Rick Oncken, a realtor who specializes in ranches at Lambros Real Estate in Missoula, Mont. “Counties may share a doctor.” Unless we put a landing strip on our property, we may have to drive several hours to get to the nearest airport. The best restaurant in town may be a café at the crossroads. “Ranches turn over after three years,” says Oncken. “People decide it’s not what they’re looking for.”

Still, for those of us who embrace the individualistic values of ranch living, it can be truly fulfilling. Many of us are inured to city life, and find rural America’s values refreshing. One obvious boon is the sense of security. Gentlemen ranchers, according to Steve Fuller, president of Fuller Western Real Estate in Denver, “feel safe. Many don’t even lock their doors.” Others see the hard-working ethos of the ranch as a welcome antidote to rampant materialism and other pressures on affluent families. “I wish every family could work on a ranch,” says Bob Funk, an entrepreneur who owns and manages several ranches. “You’re teaching kids a good work ethic. They learn values—that people are important and that conservation is important.”

Conservation is certainly another draw. Kent and Funk each see themselves as stewards of some of the West’s fast-fading history. Kent is preserving remains of settlers’ houses on his property. Funk, whose main ranch is in Yukon, Okla., has marked out the remnants of the Chisholm Trail, the great commercial roadway used by 19th-century cowboys to deliver their herds to market, which runs through his property.

Ranchers can use conservancy easements to get tax breaks. These are contracts struck with the government or a nonprofit conservancy group that limit our use of the land. For example, we may agree not to sell our land to developers in exchange for a tax break on it. When the Hearst family placed its 128-square-mile property under a conservancy easement, it received $15 million in state tax relief.

The popularity of ranches is having a significant impact on land use, prices and local economies. For example, Montana, the state which inspired early 20th-century cowboy poet D. J. O’Malley to write odes like After the Roundup, is rapidly becoming reliant on gentlemen ranchers. The most desirable ranchland in the state sells for around $1,000 an acre (less sought-after tracts can be had for $200 an acre). Prime fishing areas like the Big Hole Valley, south of Butte, are particularly coveted, as is the Madison River area, which boasts several trout streams. “Everyone wants the same thing, property on a river with lush meadows and backed up to a national forest,” Long explains. “They are working cattle ranches, but not for profit. They’re buying lifestyle.” These ranches have been appreciating at a rate of about 7.5 percent each year, he adds.

Most of the ranches on the market have been passed down through several generations, Oncken says. The families of old-time ranchers, cash poor (the average income is only about $10,000 a year) but land rich, have become eager to secure these windfalls, especially since they realize that their children will eschew the 14-hour workdays and minimal wages. “They’re usually sold because a rancher dies or the children moved away,” Oncken notes. The last owner will make more money on the ranch than all the other generations combined, he adds.

Cowboy Economics
Funk always wanted to own a piece of Western history. “I grew up in rural poverty,” he says. “I didn’t have enough money for a good cow.” As his firm, Express Personnel Services, became increasingly successful over the years, he purchased several small ranches, and finally staked his claim in Yukon in 1990, purchasing a 1,200-acre property. There he breeds Limousin cattle, revered for their lean meat, and stables rare black Clydesdales. Funk now owns about 20,000 acres in five states. To unwind on Saturdays, he puts on jeans and a cowboy hat and visits with the Yukon cowboys, occasionally attending cattle shows. “I enjoy cattle,” he says. “They don’t telephone and they don’t talk back and they love you as long as you feed them.”

One of his newest acquisitions is a 3,000-acre ranch in New Mexico. Like Kent, Funk has invested in improving the property, and has set aside land for the deer and elk, which he hunts. The former owners, who worked the land for four generations, manage the property for him, but could not have continued in their chosen way of life without an investor like Funk. “Fourth generation ranchers and cowboys cannot make it work financially,” he explains. “The price of beef is the same as it was in 1951. They’re trying to make a living off of 1950 dollars while labor and machinery costs have gone way up.”

Those of us considering the purchase of a ranch need to understand that few make money. “I live for my ranches to break even,” Funk admits. “But some have losses.” The perilous business balance of a working ranch can be knocked completely awry by nonessential investments. In some cases, those of us with no ranching background have mistakenly assumed that the ranch life can be married to the luxury life without a significant additional financial outlay.

Jeff Kanaly, vice chairman of asset management company Kanaly Trust in Houston, advises clients on the economics of ranch life. He notes that many new ranch owners try to fit their lush city lifestyles to their newly acquired ranches—at a considerable cost. “When people see a ranch house and its four bedrooms and 8-foot ceilings,” he says, “they say, ‘We need to tear it down and replace it with a $1-million house and a four-car garage.’” The result can be spiraling costs. “You’ve gone from a ranch to a resort home that requires maintenance and care,” he says. This puts further strain on the already burdened cash flows generated by the ranch’s operations. “A lot of people don’t realize how big [expenses] can get as tractors, road maintenance and pens for horses are added in,” Kanaly notes.

His clients typically begin by tearing down the old ranch house and building a log lodge—often 10,000 square feet or more. They add guesthouses, an airstrip and assorted vehicles. Some import exotic livestock such as buffalo, black buck antelope, miniature horses or even sika deer from India.

TOP VIEW Owning a ranch is a goal that beguiles many of us seeking beautiful surroundings that encourage strong values such as the importance of hard work, individualism and conservancy. But these properties are not for dilettantes: Before purchasing a ranch, we need to weigh whether the benefits we expect will outweigh the large investments in capital, time and effort that ranching requires.

Unfortunately, the land values rise more slowly than the costs of improvements. “You’re not going to get your capital cost out of it,” Kanaly says. If the buyer wants to actually run even a limited cattle operation, the costs will climb still higher. Gene Dunbar, a senior vice president at Bank of America’s Farming and Ranch Division, estimates that annual operating expenses on a $3-million ranch without cattle can easily total $100,000; add livestock, and it can run as high as $500,000. “Meanwhile, the average rancher makes only a 1 percent annual profit from his ranch,” Dunbar says. “Owning a ranch is very unprofitable.”

To understand the financial implications of owning a ranch, Kanaly advises assembling a team of advisors, including a lawyer, tax advisor, investment advisor and environmental expert. “If you do your [financial] due diligence, you can make a better assessment,” he says. We can allocate cash flow from our other businesses, and review the purchase in the context of our other assets.

Investing in a ranch, like any illiquid asset, also has a significant opportunity cost. “The buyer may have to give up [other] investment opportunities that come up,” Kanaly notes. “You have to understand the cost of [having] assets tied up in the property.”

Arsenic and Old Land
Those of us who still feel the lure of the open range after a sobering talk with our financial advisors may find the challenges have only just begun. Purchasing a ranch is complicated.

Ranch ownership rights are far more complex than those attached to most other types of real estate. Mineral or water rights may be deeded to someone other than the seller, even if he or she owns the title outright. For example, Funk has third rights to the water flowing off the mountains onto a ranch he owns in New Mexico, according to a land grant that goes back to 1868.

To unearth these often tangled ownership details and other potential liabilities, it is wise to do a thorough round of due diligence, reviewing the title, performing a phase-one environmental study, and scrutinizing water rights and fence lines. “There’s no survey to buy a ranch,” notes Fuller, the Denver-based real estate executive. “Ranchers have always done business with a handshake.”

There may be hidden dangers lurking beneath the surface as well. “I’ve seen properties where entire tractors were buried or even refrigerators,” says Kanaly. Sometimes land that appears pristine now was once a dump. There may be underground storage tanks prone to leaking, or old train beds and power lines. “One common thing that appears on working ranches is having a dipping vat for pesticides with arsenic in it,” says Bank of America’s Dunbar. “It’s very expensive to remove.” The environmental assessment is designed to unearth these issues before the acquisition is closed.

Many ranchers have conservationist leanings and see the restoration of their newfound properties to a pristine environmental condition as part of the challenge of developing this particular legacy. Kent eventually wants to place his land in trust to protect it from developers. “I want to keep it in the family,” he says.