My band was facing the same question awhile back. Go into the studio for about a grand for a five song demo or do it ourselves. We went with option B and I am having the time of my life. It's time consuming, to be sure. We did a couple things one way, then learned better ways, so went back and re-did stuff, etc. But we've learned so much, and when we're done we'll have a full length (10-plus tunes) album that we'll be really happy with. And the opportunities to always go back and fix/change stuff are great (almost too great- sometimes you just gotta put it to bed). For instance, you never realized this one cool thing the guitarist does in the solo, you go back and punch in your bass to mimic it here. Or put a little effect on the vocals there. Or wouldn't it be killer if we added some bongos under the acoustic guitar here. Or whatever. It's been a total blast. We had the hardware and software, it was just a matter of figuring it out. We do the drums live in our rehearsal space, vocals in the bathroom, bass and guitar at the space or in the apartment or wherever. I can't wait until I get to post the "hey listen to my band" thread- we're really proud of how it turned out.
And the best part is that now we can just record new songs as we go (we've stopped playing out to focus on this one). No need to think in terms of albums, write a new tune, work it out at a couple gigs, record and throw it up online. In my past experience I was always unhappy with a couple little things right after a studio demo was done, and you'd outgrow as a band so quickly. You don't want to be listening to it a year from now thinking 'oh we do this so much better now.' Do it yourself, it's the way to go. Time consuming, but so worth it.
