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Yes, this is always the dilemma. My partner and I use the home theater together in the living room and over the last 25 years upgraded it to sound great. But my passion has been 2 channel audio, so that is where my effort has gone.
You could establish an audio room and then as time permits do improvements to your main room… ones that take into account the decor. If there is no hurry… you can have both. But it depends on your family dynamics.
Just a few comments on using a small room. You can have a world class system in a small room. Also, it can cost less, but more intellectual work and understanding the acoustics and of scaling your equipment. Is required. A couple of the best systems I have ever heard were in small rooms… like 8’ x 10’. It was done by someone trying to show that it was about knowing what you were doing… not just cost and big equipment.
The awesome small rooms I have heard had high quality tube amps (but low wattage) and stand mounted speakers with acoustic treatments. Watts cost money… especially tube watts. So, you can reduce costs on speakers and amplification. Then lots of work must go into understanding acoustics and choosing equipment.