Everybody's an Investor Now

Some of these expenses, such as property taxes, have also risen significantly in this region as home values have increased. But while home prices and property taxes have soared, rents have largely stagnated over the past few years, although recently they've begun rising again. In some parts of the region, a rental glut has developed with many new rental units coming onto the market at the same time.

Many owners of larger apartment buildings aren't that worried about the future, though. They believe that rents are on an upward trend, and that demand will stay strong here, largely because of continued job growth and in-migration to the area. If interest rates start rising, which most economists predict they will, fewer renters will choose to become homeowners, thus strengthening the rental market.

At the moment, though, small investors here are finding it's hard to make the investment equation work on a month-to-month basis.

"The properties that are on the market now are so expensive that unless you put down a large down payment, you've got negative cash flow," said Robert Gratz, a lawyer and owner of several investment properties. "That's why I haven't bought anything recently. It costs money to own it and that's not a risk I'm willing to take."

To be able to afford to invest, some people are teaming up with family, friends and colleagues, according to agents who work with investors. They're also looking further out to less expensive areas or at smaller, cheaper properties.

David Fairweather, a local real estate investor and developer, said that even though "it's harder and harder for the smaller investor to find property where the numbers work," real estate investment remains the "best investment around for the person of average means."

He said prospective investors need to make sure, however, that they have the "financial wherewithal" to carry their investment. He said holding real estate for the long term, rather than "flipping" property for short-term gain, is the way to generate true wealth through real estate investing. However, he said, "an awful lot of people want to flip."

Banks have noticed the increase in investment buying and some have stepped up efforts to bring in investor borrowers, which takes the risk to a new level.

"Some banks have just recently come up with interest-only loans and new adjustable-rate programs for investors to help them manage the increases in home prices," said Steve Calem, a mortgage broker in Bethesda. "They're giving better interest rates on investment properties than they used to. I can even do 100 percent financing on an investment property now, something that was just not possible not that long ago."

Economist Zandi said investors in hot markets such as Washington are "increasingly taking on more leverage and more exotic mortgages in order to purchase homes."

It's precisely that kind of borrowing that has some people worried.

"For me, that's way out there on the risky limb," said John Silvia, chief economist at Wachovia Corp., one of the nation's largest lenders. "Interest rates are moving up and the economy is slowing down. We don't have the same conditions as two years ago or even a year ago. Investing is much riskier than it was even just six months ago."