Modern Tiny Living has hit upon a neat approach to think up new ways of maximizing space with its Shadow model: a living room that seats six, has lots of storage, and also doubles as a guest bed.

The house, from 1977, had vaulted ceilings with wood beams and tan tile floors when she bought it. Ms. Diaz, 31, a stay-at-home mother, and Manny Diaz, 30, who owns a trucking company, spent about ...