To convert a defunct language school into a luxurious one-bedroom apartment, Madrid couple Agustín Martínez Gil and Javier Quintanero relied on what could be called “the shutter switcheroo.”

The one-time school, tucked away on the second floor of a grand, six-story 19th-century apartment building near Madrid’s Royal Palace, had become a 1,700-square-foot empty shell when the couple bought it in July 2015. Its only adornment: five windows’ worth of antique, slat-free shutters.

Madrileños typically use these solid wood shutters to seal up their windows from the inside before leaving for vacation. But Mr. Martínez Gil, a 60-year-old interior architect, brought the vintage pine pieces deep into the home, using the shutters to create a paneled room divider that separates the bedroom from the open-plan living and dining area.

Later, he found traditional slatted shutters—typically used by Madrileños outside their windows—to use inside the windows. “With these outdoor shutters, you can play with the light inside,” he says.

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The adjustable room divider is also playful. The couple open and close the paneled doors depending on whether they want more privacy or a more spacious feel.

The couple paid $616,600 for the space, then spent about $538,000 on a yearlong renovation and new furnishings. Their timing was fortunate: Madrid prices bottomed out a matter of months before the couple closed their deal—and have been climbing ever since.

Prices in Madrid have risen more than 15% since early 2015, and in the couple’s neighborhood—called Palacio, after the Royal Palace—there are now apartments of similar size to theirs for sale for more than $1 million.

Typically, such 19th-century buildings in Madrid had imposing second-floor units used as offices by lawyers and doctors, who preferred to live on the floors above. The couple’s home still has its original high ceilings and parquet floors. The thick walls mean that even with the strong morning sun they can do without air-conditioning. However, they had to add a new heating and ventilation system, at a cost of $63,900.

Aside from the shutters, the former school space came with a load-bearing wall, a few doorways, a sink and a powder room.

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The couple put their kitchen behind the wall near a new dining area. To connect the two spaces, they removed a door and radically widened its frame. They then drilled large portholes on either side of the doorway.

As a result, the kitchen blends with the dining room, and the symmetrical portholes help brighten the bathroom, which they placed behind the kitchen. Their shower now stands where the school had its lone sink.

The two added a dose of coolness to the rear kitchen and bathroom by replacing a section of what Mr. Martínez Gil calls a “horrible, awful white floor,” with new Portuguese ceramic tiles in a black, white and gray check pattern.

Mr. Martínez Gil often travels to Paris and Stockholm, and the furnishings are pan-European. He updated an 18th-century Spanish antique bench with Italian upholstery, at a total cost of about $5,600. He also added an imposing wooden bar cabinet in a more traditional Spanish style. The original parquet floors were give a matte finish with Swedish varnish.

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In the living room, the couple use a leather bench reclaimed from a Madrid gym as a combination ottoman and coffee table. They also chose the living room to exhibit a Madrid-themed work of art—a painting by American artist William Rand based on a celebrity snapshot of Frank Sinatra and Ava Gardner in the city’s legendary Museo Chicote, a glamorous 20th-century watering hole visited by celebrities and toreadors. The painting—a holdover from their former home, a 3,000-square-foot apartment a short walk away—presides over the new home.

The couple built a walk-in closet off the bedroom, but chose to isolate their bathroom on the other side of the apartment.

“This apartment is made for our kind of life,” explains Mr. Martínez Gil, whose husband, a stylist, gets up early. The room divider’s two doors are kept closed in the morning, so Mr. Quintanero can shower and have breakfast without disturbing Mr. Martínez Gil.

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The couple divides their time between Madrid and the Costa del Sol’s Marbella, where they spend their summers. They also have a weekend home in a mountain village near Toledo.

The Madrid one-bedroom, which they share with their dogs, Consuelo and Theo, is smaller than their cavernous previous apartment, but the former school seems just right, says Mr. Martínez Gil.

“We are two people and two Chihuahuas,” he says. “We have all the space we need to have a comfortable life.”

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