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(i.e. C:\Program Files (x86)\Steam\steamapps\* and any locations under steamapps\libraryfolders.vdf)
It's possible to install them in separate locations should you use
[Steam > Settings > Downloads > Steam Library Folders]; no real disadvantage in having them in the same place though.
Cloud or not, some games save under C:\Program Files (x86)\Steam\userdata\<SteamID3>\<app-ID>\remote\* and others save under C:\Users\%USERPROFILE%\Documents\* or --\AppData\*
The latter is primarily why having a separate Windows User is recommended. Those games saved under the Steam\userdata\ -folder are Steam user specific, so risk of overwriting isn't really there.
If i.e. Fred was to give Bert access to his library, he has to go under [Steam > Settings > Family] on the said computer; with his (Fred's) Steam -account, then he has to authorize the said computer as one of the 10 authorized devices to access his library from, and then tick Bert's Steam user as one of the up to 5 authorized accounts that can access his library from any of the aforementioned devices.
Same goes vice versa. Bert has to authorize both the device; and Fred's account should Fred want to access Bert's library while using the said device.
1. Fred and Bert each have own Steam account (they do already)
2. Give Fred and Bert seperate Windows logins
3. Install Steam for both users - when they log into their seperate windowes accounts and seperate steam logins, both Fred and Berts Games will donwload to same local folder, but thats not an issue - at this point in time, they would only be able to play their own games.
4. Fred and Bert can each authorise family sharing, so afterwards each can play all the games in the same local library
5. Any locally saved games would still be alright as these get saved under a folder structre undferneath the windows login account
When it comes to Steam Family Sharing, do bear in mind that not every game can be shared however.