Take a long leisurely walk around your backyard to look for just the right spot. If you already have a deck or a patio consider them for your outdoor living space, but don't limit yourself. Consider other options before you decide. You might find a cozy little corner somewhere perfect for a relaxing oasis.
Study the sun patterns when you select your space so the temperature and lighting will be comfortable during the time you are most likely to use your outdoor living room. You can add outdoor light in the evening to any place you choose but during the day you can't control the sun.
Look at the outdoor furniture you already have and consider how it might fit into your space. To follow the trend of creating a living room outdoors, cluster comfortable outdoor chairs in conversational groups. You don't need a matched set of outdoor furniture. Use what you have and add what you need a little at a time. As you select outdoor furniture consider comfort and durability. Resin wicker furniture is now available that is more weather resistant while providing living room comfort-level seating. Check out modular outdoor sofas as well. They can be assembled and disassembled to fit every purpose.
Decorate your outdoor living space with plants and flowers. Don't spend a lot of money on matching planters and pots and expensive plants. Fill whatever containers you have with dirt and fill with your most durable plants that multiply easily. Use your imagination when selecting containers. Easy to maintain plants like monkey grass, marigolds, petunias are good options, depending on your climate. Fill in with a few colorful plants from you local garden shop. Set the plants on the ground beside the outdoor furniture and on the small tables. Cluster in groups for impact.
Light your outdoor living space with a string of white holiday lights or insect repellent candles or torches. If you have a few extra dollars, invest in a chiminea or ceramic fire pit. Cluster the outdoor furniture so it benefits from the light and ambiance of the crackling flames.