Finish exis basement (to rent out) or build a 2-story addition?

[Sylvia Fu]

What should I do?

Here's the scenario:

I own and live in a 3br/2ba home that we just bought in October. I live in the Bay Area.  The house has a family room (a deck that was wrapped, which is usable, but in dire condition) with an unfinished rumpus room in the basement. There are a few things we could do.  

Scenario A: Leave family room as is (sitting on piers on top a mound of concrete, area underneath is unusable), finish existing basement and add a bathroom ($30-40K) - rent the basement out for maybe $1300. (300sf) 

Scenario B: Demo family room, rebuild a two-story 1000sf addition (200K? at APR+.4%). Rent the downstairs new addition (can be 2 bedroom) out for more, since it's bigger and no longer in the basement and is fully legal as a secondary unit (~$2200, 800sf)

What would you do?