Best use for converting wasted storage space?

[Matt W.]

I'm looking at a two story house that is currently a 2/2 1300 sq ft living area, but all that 1300 area is on the top floor. The ground floor is also about 1300, divided between a 450 sqft garage and a 850 sqft storage area. Its a very inefficient use of space and is begging to be made into conditioned living area. Given, it was built this way because it is in a flood zone, but is on a beautiful tidal creek that joins the ICWW, so you take the good with the bad. 

This house is the proverbial "ugliest house on the the nice street" and every other house that has the same layout has converted the downstairs. So my question is, should I add 2 bedrooms and one bath, or should I create a "mother in law" suite with one bed, one bath and a small kitchenette? I plan to rent it for a few years after rehab, but I don't think I would be allowed to rent it as a duplex per the HOA. But I can still see the appeal to renters to have a mother in law suite. Or does making it a 4 bed/3 bath create more resale value down the line?

Thanks in advance!