The unit is in an “A” location but we don’t love the layout and it is on a very small lot with a minimal yard and one car garage. 

Also there is no way to know where the original bedrooms were or the layout of the property since there  is no records?

This house was roughly 2500 sqft, but needed a little change in layout.

But depending on actual layout, banks require a good amount of work to turn into anything that isn't a bank.

It required a full gut remodel, layout changes, and probably a second story addition.

Work with the local experts- talk with local zoning officials, engage architects, and reach out to contractors to understand the cost and feasibility of your project.Run your numbers- do some forecasting and layout some financial models to project costs, revenues, and returns.Make sure you are utilizing your team- aforementioned real estate broker, financial advisor/ CPA, and lawyer and others as you go.Best wishes and good luck.

Agreed with @Theresa HarrisGet a contractor recommendation (or multiple) from your friend and reach out to GCs yourself to have a couple of quotes and ideas for the renovation project.During the walkthroughs, you can pick the contractor's brain regarding pricing on different material grades, efficient layout ideas, etc.

If property has good layout I have seen many cash cows pop up there.

THat 2/1 is 700k-ish, just now I see 4/2 900k-ish but has basement and unique layout, rent from several rooms can be $3k-$4k here, if mortgage is $4.5 then you actual mortgage is only $0.5-$1.5.

Without knowing more details about the specifics of the project being proposed as it relates to your property, it's hard to say if there are any obvious big red flags that could negatively impact your property's future value.That being said, I would try to find out as much information as possible about the new apartment building's design and layout - the two big things I would try to ascertain would be the location of the garage entrances/exits, as well as the location of any outdoor amenity spaces (pools, terraces, dog runs, etc).