Of all the real estate investors out there, only a small percentage ever achieve the financial independence they desire.

It’s not because they lack the drive or ambition or knowledge to become rich. The reason most investors fail is because of their mindset – the way they think about money and their relationship with it.

I have come to realise that there are only 5 basic types (or levels) of investors. While some make it to the top, and others drift from one level to the other, unfortunately most sit at one level for their entire life. They become stuck because of their mindset which prevents their financial success.

The good news is that with some insight, education and a bit of re-programming, you too can make it to the top. So let’s take a closer look at the different levels of investor;

Level 0 - The Spender
Level 0 investors are not really investors - they are spenders and borrowers and often end up with a high level of debt. They spend everything they earn and more, surviving from pay packet to pay packet and using credit cards when they run out of money. Their solution to financial issues is to spend their way out of them or take on more debt. The biggest problem is that as they earn more, they spend more.

They think more money will solve their problems, yet no matter how much they earn, they go deeper into debt. They fail to see that the real problem is not their level of income, but their bad money habits. It’s what they do with the money they earn. Today, they can’t survive on the type of income they would have only dreamed they could achieve five years ago. They are consumers who spend their money as soon as, or even before it comes in, rather than conserving it for the future.

Many high income earners fall into this category because they spend as much, or more, than they make. Some spenders look rich. They may even have big homes or fancy cars, but they also have huge loans that they have difficulty repaying.

Level 1 – The Saver
Most Australian who are not spenders will generally be savers. Their main investment is their house, which they aim to pay off over time. Sometimes they also save a little, but in general they save to consume, not invest.

They tend to be afraid of financial matters and are unwilling to take risks. They’re following the plan their parents followed – get a steady job, buy a house, pay it off and build a nest egg. The problem is saving, or owning your home outright, doesn’t make you rich.

If you think about it, saving doesn’t work because of;

• Inflation - What you save today won’t be worth the same in 20 years time;

• Income tax - The average Australian loses 30% to 40% of their income in taxes over their lifetime;

• Spending – Many people spend a large chunk of their income on consumables: another car, a bigger TV, etc, all the while eating up much of the money they should put away for retirement.

Level 1 investors are what I would call financially illiterate and need to focus their efforts on building a solid base of financial and investment skills, upon which they can grow their financial future. They will get the most leverage by investing in a quality financial education and building a network of peers they can make the journey with.

Level 2 – The Passive Investor
Level 2 investors are aware of the need to invest, so they start learning about investment and begin accumulating assets.

While generally intelligent, Level 2 investors are still financially illiterate - they don’t really understand the rules of money. They have very little idea as to how or where to invest, so many blindly follow the advice of financial planners. These investors are usually taught to put their money into managed funds or blue chip shares because they are ‘safe’, and to spread risk by diversifying. Interestingly, most successful investors don’t diversify - they find a niche to specialise in.

The problem is (as we’ve recently witnessed with the global financial crisis), diversification doesn’t necessarily protect your portfolio.

Level 2 investors need to refine their financial and investing education and focus their efforts on choosing a specific wealth vehicle to master and begin taking control of their financial destiny.

Level 3 -The Active Investor
Level 3 investors realise they must take responsibility for their financial education and become actively involved in their investment decisions. They build a knowledge base of investment strategies and techniques and grow to understand and use the three marvels of wealth accumulation: compound interest, leverage and tax favoured investments to get their money working for them.

These investors actively participate in the management of their investments and concentrate on building their net worth.

Level 3 investors usually leverage the time and expertise of a network of industry professionals and upgrade their network of advisors and peers, often joining a Mastermind group of like minded people.

As this is the asset accumulation stage of their investment life, they need assets that generate wealth producing rates of return. That’s why many chose high growth, low yield investments such as residential real estate.

Level 3 investors must focus on actively making their assets more valuable before, during, or after they acquire them. Successful active investors grow the asset base faster by “manufacturing” capital growth by renovating or redeveloping their properties.

Level 4 – The Professional Investor
A very small group of investors move to the top rung of the ladder as a Level 4 investor. They are financially independent because they have a substantial asset base. Their property portfolio generates sufficient recurring passive income to pay for their lifestyle, plus keep growing their investment portfolio whether they work or not.

Level 4 investors are financial fluent and well educated in the world of investing. They tend to concentrate on optimising the performance of their investments, whilst at the same time minimising their risks. While they are still accumulating assets, they are now more interested in cashflow.

Professional investors realise the value of outsourcing much of the work for their investment business, with a team of accountants, property managers, solicitors and property strategists to assist them in managing and growing their portfolio.

Professional investors know that bad economic times provide some of the best opportunities for success, which means they get into the markets when others are getting out. They thrive in difficult times, not just survive.

Level 4 investors subscribe to investment newsletters, attend seminars, surround themselves with a great team of advisors and mentors, and are prepared to pay for solid advice - to increase their wealth and protect their assets.

Level 4 investors personally own very little in their own names, controlling everything through companies and trusts. By controlling the legal entities that own their assets, these investors gain considerable legal tax and asset protection benefits.

How far up the investment ladder are you? Where do you currently sit in this hierarchy of investors?

The bad news is that many investors are often stuck at an investor level that prevents their financial success. The good news is that with a little effort anyone can upgrade their skills and investor level.

Author's Bio: 

Michael Yardney is a best selling author and one of Australia's leading expert in the psychology of successful and wealth creation through property and investing.

Michael is a successful property developer and property investor and, as a director of Metropole Property Investment Strategists, his opinions as a property commentator are highly sought after and frequently quoted in the press.

He is Australia's most published property author and has probably educated more successful property investors than anyone else in Australasia.

Michael is the publisher of Australia’s leading property investment e-magazine “Property Update” - www.PropertyUpdate.com.au - with over 45,000 subscribers and author of the runaway best selling book “How to Grow a Multi Million Dollar Property Portfolio in your spare time”.

His latest book "Thriving not just Surviving in Changing Times" is destined to become another best seller. He has co authored two other top selling books: “All you need to know about Buying and Selling your home” with his wife Pamela Yardney and Secrets of Property Millionaires Exposed.

His opinions as a property commentator are regularly featured in the media including press, magazines and on the radio.

You can subscribe for free at www.PropertyUpdate.com.au