Water – Best Water-Heater Location

There should be no problem locating two gas burning appliances close together as long as you have proper ventilation. The reason your manual says not to put two items is a closet is that they may create excessive heat when used together. As long as you have good spacing, good venting and a source of combustion air, you will be fine.

As stated, the room, itself, would have to meet codes for a bedroom (size, egress, etc.)

As for the water heater, it needs combustion air. If the room is smallish and making it a bedroom means it's going to be closed off, then you likely will need to convert the gas heater to either electric or to direct vent. The latter adds a blower that pulls in combustion air from outside. The con to that is that it may be noisy if in a closet.