Having an extra room for the au pair is a basic requirement for all host families.
If you don't have enough space at your home, you may think of accommodating the au pair outside the family's home. This option is not really conventional, but it is acceptable when it is the only possibility due to space limitations. It is important that you mention it in your profile or tell the au pairs during the interviews so that they get an idea of what to expect.
The personal connection to the host family is a very important point. If your au pair is not living in your home, you need to make sure that you and your au pair spend as much time together as possible. The au pair must be integrated into family life and learn more about the culture of the host country. This is all part of the basic concept of au pairing.
Under no circumstances should the au pair sleep in the same room as the host children on a daily basis. Only in exceptional cases, such as in a vacation or holiday flat could this option be acceptable.