How to get more value out of primary residence?

[Vipin S.]

Hello,

I live in in the city of Santa Clara (in Santa Clara County) in California. Here are some home facts before I ask the question:

• - Current market value from Zillow: $1.5M
• - Number of bedrooms: 3
• - Number of full baths: 2
• - Living space: 1425 SQFT
• - Lot size: 5742 SQFT
• - Lot dimensions: 58x99
• - Number of stories: One
• - Built: 1955
• - Zoning: R1-6L
• - Floor area ratio: 40%

I would like to add more living space and convert 3beds, 2baths to 5beds, 4baths structure. There are few options available; in both options I would like to maximize the living space so that I get the best overall market value of the home.

• - Expand into backyard
• -- Pros
• --- Cheaper to build
• --- Continue to live-in while addition is progressing
• -- Cons
• --- Less backyard space
• --- Likely won't be able to maximize SQFT living space due to zoning constraints for same floor construction.
• - Add second floor
• -- Pros
• --- More backyard space
• -- Cons
• --- Expensive to build
• --- Likely need to move out for a few months while the addition is progressing

What is the right strategy here? Is the extra cost of building up right call for the return on investment? What do renters/buyers typically prefer? Building on same floor would likely limit the maximum living space and hence overall house value. 

I am hoping to hear from a realtor or experts in the business to understand the pros and cons of the two options. 

Thanks!