Upgrading house

I am new to Somersoft. I am thrilled to find this forum. It has already provided me with so much invaluable information.
Anyway, here is my situation...
My husband and I are currently renovating a house in Melbourne. It is a three bedroom, single-storey Californian bungalow. It is close to shops, schools, transport, parks, beach and ten minutes from the city. It is an area that is constantly improving, growing and gaining popularity. We really like the area, but with children we are slowly outgrowing our house. We would like to improve our situation by upgrading, but we are unsure of the best way to do this.
The two options we have come up with are as follows:
Option 1 - Finish renovating as planned - (bathroom, add an ensuite, landscape frontyard), sell house and take out a bigger mortgage to upgrade to a bigger house?
Option 2 - Continue renovating house, buy an investment property and in a few years sell both to upgrade.
Option 3 - Save for a second storey, but we do not gain any land which we would like more of...
Is there another option that we have missed?
Please any advice would be appreciated. Thank you in advance.
We lived in a Californian Bungalow which was a beautiful, quality house. We faced the same thing and had plans drawn up to drop down a level and build under where the land fell away.

We ended up selling due to the parallel runway and our proximity to the flight path, but the people who bought it from us plonked a pretty ugly second story on. It ruined the house's aesthetics completely, but gave them lots of extra space.

When you consider the costs of selling and buying again, why not do the second story extension and as long as you do it sensibly and don't blow the budget, the house value should increase by at least what you put into it (fingers crossed). If you need more yard space in a few years, you have a bigger and better house to sell.

I'd think you would be up for roughly $50K just to buy and sell (agent fees, stamp duty etc) which could go towards your second story extension.

Just make sure you stick to the style of the original (unlike the people who bought ours) :(.
We are faced with this delemna too. At the moment (because we have contaminated our loan for investment purposes), we are thinking of waiting until we have paid this PPOR off or close to in around 7yrs time, and then upgrading to our 'Dream Home' which we will build on a decent block then.

Or alternatively we are considering buying or building a bigger place (but not a dream home) in the next couple of years, and then renting it out for a year or two (get the tax benefits, etc) before we move into it ourselves.

Still undecided as to whether to sell or hold our current PPOR. My instincts are saying to hold it as an IP, but because of the loan it may make better financial sense to sell it and purchase another. Eitherway I won't be selling for at least another couple of years, there are too many other newly built bigger better (with air con etc) houses in the same suburb for sale at the moment.
Hi rugrat. I would think the costs of selling just to avoid the loan contamination problem would be overkill.

I am not sure of the size of the problem, but we also had this problem a few years back and we just paid the accountant a little extra (I imagine) to apportion which bit of interest related to our personal use and which was for investment purposes.

I hated having one loan which had both personal and investment portions, but that is probably linked to my personality more so than that it cost us money for the accountant to apportion interest each year. (I like my things to be in neat boxes... investment loan, private loan.)