With mortgage rates and rising home prices grinding away at affordable options for homebuyers, accessory dwelling units — or ADUs — have become increasingly popular amongst residents of states facing prolonged housing crises, like California.

Studio Shed Co-Founder and President Mike Koenig sits down with Yahoo Finance's Rachelle Akuffo to talk about new state policies allowing for ADU installments next to primary lodging.

"Now, it is becoming easier as the weeks and months go on, as municipalities combine with better zoning policies on the state level to effectively get an ADU in your backyard," Koenig says, referencing California's AB 1033 bill.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

This post was written by Luke Carberry Mogan.

Video Transcript

RACHELLE AKUFFO: An Accessory Dwelling Unit or an ADU is an independent living quarter built on the same lot as an existing residence.

They can be attached like an above-garage dwelling or completely separate from the main home.

Now, while some build them to house additional family members, they can also be rented out for extra income and adding much needed housing to areas short of affordable options.

Now, states are opening up new possibilities for the spaces.

With new policies in California, an ADU can now legally be converted to as-- converted to and sold as a condo.

And when underwriting a mortgage, lenders can now count a portion of estimated rental income from ADUs.

Mike Koenig is the co-founder and president of Studio Shed, the leading manufacturer of accessory dwelling units and backyard structures.

Thank you for joining me in this morning.

So give us the lay of the land here.

With these new policies opening up, what are some of the investments and the opportunities that now come with this expansion?

MIKE KOENIG: Yeah, I think there is-- well, first there's a lot of investments, I believe, to be made in terms of just adding income to your existing property.

And for, say, real estate investors who are looking to-- I think as the climate gets a little more, say, riskier or capital becomes a little harder to obtain with rates, you can effectively take, like, an apartment building and spread it out over many homes.

RACHELLE AKUFFO: So then for people who are wondering if they build their ADU in their backyard as a separate unit here, how does that work when they're trying to sell their property?

Will they have to sell the ADU with the main residence as well or how does that get navigated?

MIKE KOENIG: Yeah, well, California just passed Bill 1033 and Seattle has already been doing this for, I believe, a couple of years.

And it's effectively, you're parceling off that part of the real estate, so you can just sell off the ADU or the home.

And it just becomes zoned as a multi-- like a condo.

RACHELLE AKUFFO: So I mean then for people who are wondering about regulations, obviously, it's different state by state.

We've seen California leading the way here.

What are the main questions that you get about regulations for people who are interested in building an ADU, say, in their backyard or on top of their home?

MIKE KOENIG: Yeah, so some of the typical questions are one, can I put an ADU in my backyard and then the second is, well, how big can I go?

Our products range from studio-style ADUs to we offer up to a two bedroom, two bathroom.

So the first is can you do an ADU in your backyard, and the second, of course, is what size should they go with.

Now, it is becoming easier as the weeks and months go on, as municipalities combined with better zoning policies on the state level to effectively get an ADU in your backyard.

It historically has not been easy.

I think with the new FHA policy on financing, it obviously opens up access on a much broader level because you can qualify your income for the underwriting.

And of course, with California Bill 1033, I think other states will follow, like, again, Seattle or Washington already did.

So I think the challenge remains really on the municipal level and the speed at which the municipalities are able to expedite the permits.

That's really the longest stage in the whole cycle whether you're Studio Shed like us.

I mean, ours is faster because we have pre-engineered buildings, and plant sets, and all these things.

But there's a disconnect between the number of ADU units that each municipality has a goal of.

Denver, for example, wants to do 20,000 over the next, I believe, it's 10 years.

But there's such a lag on the municipal level, so that's something I think is the next opportunity for cities to work on.

RACHELLE AKUFFO: So Mike, with that in mind then, how far do you think adding ADUs into the mix is going to go into solving the affordability issue and the inventory issue that we're currently seeing in the housing market?

MIKE KOENIG: I think it's, you know, never one thing, right?

So it's I think that there's a lot of changes that need to be made.

And again, I think that speed is critical.

So I think you're seeing more prefab or hybrid prefab, 3D module solutions coming out.

And the ADUs are an excellent way to offset the high price of real estate and quickly add more doors or beds if you will.

RACHELLE AKUFFO: Well, I appreciate you taking the time to break all of that down for us in these interesting developments that we're seeing here, especially as people might be looking for some extra sources of income as well.

Mike Koenig, Studio Shed co-founder and president, thank you for taking the time today.

MIKE KOENIG: Thanks so much, Rachelle.