Thanks to all who responded. Living in and renting out the other room wouldn't be ideal for her situation, plus it would increase her expenses with her income staying the same (the rental income would be going to her siblings in that case).
I think buying a property with the inheritance might be a stretch - she would need to live near family and her healthcare providers and resources and cost wise that is probably unrealistic, plus her expenses would increase if living alone.
The parents home will likely be split amongst the three siblings when the time comes but the parents are in good health and that time is likely quite far away.
As fairy1 said it's the capital that's assessed for DA not the rental income. Unfortunate and doesn't make much sense to me, surely it would be a better system to use the rental income as means and allow people to start partially supporting themselves. I imagine where this situation arises most people sell and quickly dispose of the money on whatever they can so as not to lose their benefit, which seems counterintuitive to saving money for the state.
Selling is probably going to be the realistic option, which we thought was probably the case but wanted to be sure we weren't missing anything. Thanks again everyone.