My place small too. Was old fisherman cottage long time ago. I honestly not think your issue is size of space.

It easy come into this business as someone who love children but in home daycare, that not enough. It is business and must not under estimate the skill set needed to run business. There will be contract issue, non-payment issue, handling difficult client, enforcing boundaries - non which directly from the children.

Don't be concerned about under hand practice of competition. Fact she send 4 people show she concerned. You cannot compete on space unless you plan to move so you have compete on level service and ignore what competition has or doing.

Focus on marketing self as small, intimate place. Make sure your name out in your local market. Place ad anywhere parent might be. Try focus on your business not gaze longing at other person. When you spending time distracted by your competition, you not building your business.