1) Be realistic.
There are many possible options: pool areas, Zen gardens, outdoor lounge areas, playground areas, outdoor hot tubs, etc. It depends not only on your space and investment, also on the needs of inhabitants of your home. For instance, if you have a dog will be difficult to maintain a Zen garden. If there are small kids, you probably will think in them providing safety areas to play
2) Choose proximity.
Locate your outdoor living room area in direct connection with your living room. In that way, it will be an extension of it, you will improve the views from indoors, and it will have an easier flow of traffic between spaces. The same if you are installing a barbecue or a picnic area, it should be close to the kitchen. Pool areas should have access to a bathroom without crossing the entire house.
3) Define the dimensions.
Being in an outdoor living room doesn’t mean it have to take the entire space of your backyard or terrace. As in any other space, define “walls” and “floors”, and even “ceilings”. The floor should be easy to clean and low maintenance, a good choice is colored concrete or stone tiles. A teak deck outstands for its elegance, durability and low maintenance.
For the “walls”, consider lower vertical elements that may be more attractive/functional, as raised beds, container gardens, or hedges. If you don’t want to wait for hedges to get tall enough to afford privacy, install lattice screens, instead. To satisfy your requirement for plants and provide further privacy, train vine plants to grow up the lattice.
The “ceiling” is very important to provide shade and shelter from rain. A vine-covered arbor may be more inspiring to gaze up at than a lawn umbrella, but the latter will keep you, and the books you may be reading, dry. If you’d like something more solid than an umbrella, consider installing a pergola and covering it with fiberglass.