House hacking an unpermitted room addition?

[David West]

I am new to the forums and this is my first post. I purchased my first home in San Diego, CA near San Diego State University in September of 2015. It is a home built in the 1940's and there is an unpermitted room with a separate entrance under the house.  Before I moved in, the mother of the owner was living in this unit. It is only around 300 square feet, but there is a kitchen, a bathroom, a bedroom, and a small living room. I definitely need to put some money into rehabbing the space, but once it is complete I don't think I'll have a problem renting it out. My concern is the liability of renting out that unpermitted space. The inspector said the ceilings are too low and the windows are not fire safe. Should I put the money into getting the space updated and rent it out to a tenant, another option is to rent it on Air BnB or something similar, or I can convert the space into something different all together (man cave, media room, or storage)? I would greatly appreciate any feedback!