Learn Turkish: Orada garip bir canlı yaşardı. - A strange living creature would live there.

In Turkish, the standard word order is Adjective + bir + Noun. So, the English phrase a strange creature translates to garip bir canlı. If you put bir first to make it bir garip canlı, it places special emphasis on the number one or sounds much more literary and poetic.

I thought canlı meant alive. Why does it mean creature here?

You are right that canlı is generally an adjective meaning alive or having life. It comes from can, meaning life or soul, plus the -lı suffix. However, in Turkish, adjectives are very frequently used as nouns. Here, it stands in for a living thing or creature.

How is yaşardı formed, and why not just use the simple past yaşadı?

The verb yaşardı combines the verb stem yaşa- with the aorist suffix -r and the past tense suffix -dı. This forms the past aorist tense, meaning used to live or would live. If the sentence used the simple past yaşadı, it would just state the completed fact that it lived there, losing the habitual or ongoing background feeling.

Since this sounds like a story, why doesn't it use the -mış reported past tense?