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Forget buy-to-let! Here’s my plan for building a retirement pot using shares

Many people realise that the State Pension is capable of funding just a modest lifestyle in retirement. They understand the need to generate extra retirement funds and so buying property using buy-to-let mortgage funding became a popular option in the past.

However, running a property rental business is not for the faint-hearted, especially if you are holding down a day job and pursuing a career unrelated to your real estate interests. I would imagine that kind of set-up could become stressful at times.

An unattractive sector

But apart from all the hassle involved in running a property business, buy-to-let is becoming less attractive for the individual because of the government’s clampdown on the sector, which essentially raised taxes, making it harder to turn a profit from renting out housing.

On top of that, property prices look toppy to me, and I think there’s an elevated risk that property values could shrink in the future. That’s an important consideration because a great deal of the total return that buy-to-let investors have enjoyed historically came from capital gains because of rising property prices.

So I’d forget buy-to-let, and I’m not the only one. It’s been well-reported that in recent months and years people have been selling up to cash in their gains from buy-to-let. The sector is in decline and that presents opportunities for larger property companies to expand their operations profitably because of reduced competition from individuals operating buy-to-let businesses.

Listed property companies

The great news is that many property companies are listed on the stock market, which means you can buy their shares and hold them. I think that’s a great strategy for building a retirement pot because you’ll be able to compound dividend income and capital gains from your shares over the years. Your investments will still be backed by real estate but without all the hassle involved with direct, hands-on ownership of buildings.

One example of a firm involved in the property market is developer Urban & Civic (LSE: UANC), which delivered its half-year results report today. The company buys land, secures planning permission and works with housebuilders to develop housing using licensing agreements. It also develops commercial and other properties.

The adjusted net asset value per share rose 2.7% compared to the equivalent period a year ago and the directors increased the interim dividend by 7.7%, which I reckon demonstrates some confidence in the outlook.

A positive outlook

The company said in the report that we are in a market where “housebuilders are going well and estate agents badly.” However, Urban & Civic creates value by obtaining planning consents and “delivering new environments in which housebuilders want to build and new homeowners want to live.” The firm expects to “exceed” previous sales guidance for the current year, suggesting steady ongoing trading in my view.

But Urban & Civic is just one of many property-backed shares you can choose on the London stock market. I’d diversify my portfolio across several property companies, but I’d also buy shares in dividend-paying firms operating in other, non-property sectors. Indeed, a good spread of diversified stocks from several sectors would be central to my plan for building a retirement pot using shares.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.