I would consider keeping some lawn for your nightly trip, but it sounds like your soil is really compacted. A good rework or till with some compost should bring it back for grass.
The flag stone would look great if you had a point of attraction like pergola. This would give you a purpose to go out and sit under it. Maybe even plant some vine for shade. It should be cheap to build compared to a gazebo or deck.
So I'm picturing a half in half area. You could even get fancy and make the edge where they meet swoop around.
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