What happens to those people when the tax outweighs the profit?

Overall, weight all pro's and con's and decide which one outweighs the other.

@Travis Hole The risk and hassle factor will far outweigh the pro's.

Rent has increased over the years just because rent has increased in that area due to the demand for rentals outweighing the supply.

I could sustain that for a year or two where by then we'd be at zero cash flow and the tax benefits would far outweigh the rest.

In all likelihood, the costs do not outweigh the benefits.

Additionally, it would be in your best interest to compare loan models, FHA 203ks come with several strings attached generally including on-site inspection reviews for draws, certified (for FHA purposes) contractors, PMI, and significantc origination fee which added together very well may outweigh the value of their advertised interest rates.It's worth considering a conventional LOC.

If it was in a better market then probably, but I agree, I think the risks outweigh the benefits. 

The complicated part comes in figuring out if that outweighs the tax deferred or tax free growth of the retirement accounts. 

Advantages of not incorporating outweigh advantages of incorporating when you are starting and growing your investments.