Part of that Location, Location, Location is comparison to neighboring homes.
If all the homes in the area are 200-225,000 then you no matter how nice, big or what kind of feature that you have in your house you are not going to get $350,000 for it for example.
And 2 bedrooms, 1.5 baths, 1000 sq ft is much more than a MIL suite. It more like a duplex.
If this area is zoned that will have a lot to say about whether you can do this or not.
A consultation with a local realestate agent or two would give more helpful and local market value with and without this.