Minimum space layouts offer a number of advantages and a great level of operation despite their limited size.
In North America, there seems to be this belief that if a model railroad does not fill a basement or spare room then it isn't a layout. Nothing could be further from the truth.
On the other side of the Atlantic, European modelers often build very small layouts simply because they do not have the space available that their U.S. counterparts have. This lack of space does not limit them from participating in the hobby, and despite their limited size they build exceptional layouts. Therefore a small layout is no less a layout than a large one.
I truly believe that a first layout should be a very small one. There is no better way to develop the skills and get a full understanding of what is required to build a layout through all phases in a small amount of time than through building a small layout.
Some possible benefits of building a minimum space layout are as follows:
Due to the very small footprint of these types of layouts they are often completed in a very short amount of time usually a few months. A driven modeler with access to the needed supplies can easily complete such a layout over a few days. Of course a layout doesn't need to be completed in a short period, one can take one's time and work only when the mood strikes.
Again due to the limited scope of such a project the cost is often very minimal. Less track, less rolling stock and less structures means much less cost. Also this offers the potential to scratch build should the modeler so wish.
On large layouts the level of detail achieved is often limited by the amount of time available to the modeler. With small layouts this is not the case and the modeler is able to devote a larger amount of time to detailing, it is possible to detail such a layout to the n-th degree.
Small layouts tend to be extremely portable due to their small size. If constructed using lightweight materials such as foam insulation board they can easily be transported to train shows for exhibition.
Sometimes small layouts can easily be stored in locations other layouts would not fit like under a bed in a spare room or atop a set of narrow bookshelves.
A number of myths about small layouts exist that need to be dispelled.
Consider a layout with just one switch (turnout or point). Many would believe this to be too simple a layout to provide adequate or engaging operation and yet it is entirely possible to have a very engaging layout that provides realistic operation using only one turnout.
Although switching puzzles are quite popular themes for small train layouts, not all small layouts have to be puzzles.
Not all small layouts need to be a loop of track with a train chasing its tail. Realistic operation is easily achieved on a small layout with the use of a little staging to represent destinations beyond the modeled portion.
What separates a static diorama or display from a small layout is that a layout actually offers the ability to run trains as opposed to the diorama which is no more than a static display, often a small layout occupies no more space than a diorama. A simple layout such as a loop of track will allow the train to run continuously around the loop effectively chasing its tail. While this is not realistic (real trains do not chase their tails) it still differs from the static display in the sense that trains are moving.
At the other end of the spectrum, small layouts are able to offer exceptionally realistic operation using a switching (shunting) scheme. Often industries will be represented whereby a freight car (wagon) will need to be delivered to said industry and possibly another freight car may need to be picked up. This setting out and picking up of freight cars is extremely close to what real trains do on the prototype. Staging (discussed next) makes this all more plausible by representing industries that are "off-line", not on the modeled posrtion of the rail network. Thus a car can go from an industry that is modeled to an industry that is not modeled via staging, and vice versa.
Of course there are certain limitations. A small layout will often not be able to offer the ability to run long trains between towns as there simply is not enough space to do so. Such operation requires a large amount of space.
It simply is not possible to model the entire rail network of a continent, no one has that kind of space at their disposal. Thus we need a way to represent cars coming from and going to destinations beyond the modeled portion of the layout. This is done through staging, which can be thought of in similar fashion to the off-stage behind the scenes area of a theatre stage, when the actors are ready for their performance they wait behind the scenes and then go on stage on cue and exit the stage when their part is done. Much like actors, cars and trains can be staged prior to going onto the layout using staging.
Staging is often acomplished through the use of "casette" staging. Small casettes are constructed that can hold a couple of cars, a locomotive or even a whole train if it is short enough to fit onto such a casette.
Selecting a Scale and Gauge is not as easy as it at first seems. When faced with minimum space the natural tendency is to gravitate towards the smaller scales especially N scale, however that is not to say the larger scales cannot be used. Many builders of smaller layouts opt for narrow gauge as this allows a larger scale with smaller rolling stock. Consider a 30' narrow gauge box car in HO scale(1:87), it is not much longer than a standard gauge 50' box car in N scale (1:160), this means that for a given length of tangent track, roughly the same number of cars can be accomodated with a larger scale.
Of course not all aspects hold up to this "upscaling". The footprint of buildings will require 4x as much space in a scale that is double the size, this is because the area is determined by length multiplied by breadth. Doubling both results in quadruple the amount of area required. In many cases such as these, the rail facing portion of the building is modeled as a backdrop flat or low relief structure against a backdrop.
Small is the name of the game here, the smaller, the better. See Critters for some examples and mini reviews.