I'm contemplating this decision because I'm not sure if it would be desirable for tenants to have an extra room instead just a loft area.

It actually creates more taxes owed total than your friend telling the truth to the IRS.

With this set up, we were able to get a DSCR loan through Kiavi with only a few extra steps compared to an LLC.  

It works great for wholesalers who sell the deals to a flipper, so a flipper can reap the rewards by going the extra mile and conducting their own marketing

I am working on what to fill the extra time with at the moment.  

Consider remote monitoring tools (like security cameras), and budget an extra 10-15% for surprises.

Maybe take extra steps like walking the prospect to their car and glancing into it, while that is not a 100% indication that they will be a good resident, it definitely helps.

I’ve been interested in getting into real estate as a way to potentially have extra income and also have more of a safety net in retirement, either through cashing in on equity or continuing to own rentals.

Keeping this as a rental would not cover the mortgage (we'd have to pay ~1500 a month including utilities) and we can afford the extra payment, but is it worth it when looking at appreciation?

The truth is, everything works - and so everything can both be a good investment or a waste of money lol!