I once built and lived in a 3,500 square foot home in an old part of town. My new (circa 1858) house is the size of my previous home's living and dining room combined, but I love, love, love it. No grand property to look after, and a lot less cleaning. But best of all, instead of having to worry about buying enough stuff to fill the place, I can be very picky and choose just the things I like. My new home is cheaper and way more sustainable. It's so comfortable to be free of the burdens and just enjoy home ownership.
Biggest Challenge of Living in a Small Space:
Create interest and 'flow' . To do this I used the ceiling to create interest and spatial definition. I lowered the ceiling about 9" to be in proportion to the room, and used bulkheads to define spaces. I removed almost all the interior walls of the old cottage and got rid of all the doors (except for the bathroom); spaces are hinged by strategically placed walls and ceiling components. I also added built-ins everywhere I could, basically creating furniture to fit perfectly into each space. Lots of shelves, buffets, bed, etc. I even built some free-standing furniture to address movement patterns because I couldn't find a product that worked as well.
I wanted to use trim to give character to the space, using cedar siding, and ripped off the tongue and groove, sanded, and stained it and used it for all the trim and for some walls.