Sell, Build or Subdivide??

Hi there…I would love some of your thoughts on our current situation.

We currently rent but are fast running out of room with 2 kids and need a bigger family house with a backyard.  For what we need (3/4 bdrm + study) in the area we live in would be around $550/week.

We have an investment property in Seaford, VIC.  We have owned the property for 4 years and it is currently tenanted.  We bought for $195,000 (and still owe that on IO) and is currently worth about $360,000.  The problem is the house is very old and run down and if we were to sell we would be limiting ourselves to developers who would knock down and rebuild.  I doubt FHO would pay that much for land and then have to build.  The block is 585sqm and only 700 metres from the foreshore but is on a busy road.

Our current options are:

1. Sell as is and use $$ towards a family house (can borrow $440K with a max purchase price of $550K) but that would be at a stretch
2. Knockdown and rebuild a family house to live in on the block (issues with affording mortgage, build costs and rent at same time) but would have a brand new house worth over $600K
3. Look into subdividing to potentially increase profit
4. Pay to get house demolished and plans/permits for 2 units/townhouses and then sell to increase profits
5. Continue to rent out and rent ourselves

I firmly believe that Seaford still has more growth in it which is why I am reluctant to sell the property unless we reinvest in the area.  I know the block will be worth a lot more in 10 years time because of the proximity to the water and Eastlink freeway but it does not help our current needs in terms of living arrangements.  

We are pretty limited as to where we can buy even if we do sell because we are on one wage at the moment but we would be happy to live in Seaford which is making me lean towards developing the block to live in as the house will then be worth a lot more and we may even have some instant equity but living on a main road is a concern.

HELP?????