You really cannot compare the two options...

The extension is exactly that; an extension to the house....that happens to have a garage inside it...

The separate building is a 'shed' round back...

The first will cost you more but give a better return both on rental and capital investment later, but you'll struggle to do some of the noisier work inside if the Ground floor is adjoining somebody else's demise...

You need also to make sure the extension is not 'over developing the site'... ie if you were to sell then does the additional floor space give you the additional value? The separate garage, well built and pretty well serviced may bring you to that threshold already.. especially as it could be a twin unit rental or revert to single family dwelling...