You do not need a large room for a recording studio. Even if you intend to produce bands, you may only need to record one instrument at a time. Choose a compact room--as this will be easier to soundproof--that is connected to the main supply and, ideally, is tucked away in a quiet part of the house. A loft or basement makes an ideal recording studio.
To set up a modern recording studio you need a computer. Computers have eliminated the need for lots of bulky and expensive music recording hardware, meaning it is far more affordable to set up your own recording studio. Either an Apple Mac or a PC is fine, but make sure the computer you purchase has as much memory and RAM as possible.
There are a lot of music software packages out there. Some only let you perform the most basic mixing tasks and are really designed for personal use only. If you are looking to create professional quality tracks, Cakewalk Sonar studio recording software is a good option for PC. For the Mac, Apple Logic Pro is one of the best options. Another good option, Steinberg Cubase recording software can be used with both Macs and PCs.
Purchase a MIDI interface and an audio interface, or "mixer." MIDI--Musical Instrument Digital Interface--is the process allowing various musical input to be registered by a computer so that one person can create multi-part music on his own. MIDI does not record audio, though. It only registers input and frequency in computer language. For those changes to be transferred back into audio you need a mixer. If your budget is extremely tight, the sound card that comes with your computer will perform the same function, but the quality of your recording will be far poorer.
The microphone is the most recognizable piece of equipment for your sound studio. The choice and variance in quality of microphones is greater than with any of the other equipment needed for a recording studio. There are mics available for a few dollars, others for a few thousand dollars. While it is not necessary to spend thousands of dollars you do need a decent microphone to ensure a crisp recording with no background interference being picked up.
Having the best equipment will count for nothing if your studio is not soundproofed. All recordings will be ruined by loud neighbors, or fire trucks responding to emergencies outside. Lay soundproofing mat under the floor of your studio to dampen noise coming from below. Attach empty egg cartons and foam padding to the walls and ceiling of the room to create a studded effect; then cover the floor, walls and ceiling with at least two layers of thick plasterboard. You will have effectively created a room within a room. Finally, double glaze any windows to ensure there is no interference from outside.