photo of garage ? and dimensions ? any pipes in the way ? etc ? we've just recently converted one..costed 6K in materials alone hubby did most of the work ..measure your ceilings you need 2.4m height for bedrooms..garages tends to be lower ceiling thus doesn't meet regulations

insulated corrugated Colorbond steel roof with a galvanised corrugated steel ceiling as we were aiming to keep it cool/warm without a standard painted ceiling..we added one 75cm wide transluscent panel to add extra light over a kitchen window as our room is enclosed on 3 sides. Your space doesn't look big enough to have a problem with darkness but you may need to be careful not to improve/change it too much without Council approval. Our screens are made of black Sarlon stretched and stapled over timber frames (like a giant flyscreen) and the screens are then screwed to the framework of the pergola... quick and easy to install and remove for moving big furniture in and out

Definantely keep the old garage, it's been there much too long to be considered illegal, your neighbour would also love the privacy it provides to both of you, we have a similar one next to our pool, we love it. Agree some gardening and clearing away some old bits and pieces. Just attaching a couple more photos, don't throw the plants away just repurpose them. the first photo is of a builders house, he used the existing garage as a games room with added pergola over original driveway, a second carport is off to the left looks brilliant (they get quite a lot of sun on this side). The next two are before and after shots of a mid centuary house similar to your's, the last photo is of our current house, flat roof garage is hiding solar panels, we have changed the colour pink to a more original one, grey green.

That's too vague a question. What people where? One thing I thought of is if you have a double carport you have the possible option of enclosing the walls later fairly economically whereas building on an extra bedroom is often a bigger task. It's not always that straightforward though and you haven't provided enough information, so take that only as a broad generaisation which might or might not work for you.