I figure doing my own flips and renovations will offer the highest potential for long-term profits with my current situation in a rural area.

Otherwise, profits are lower, it's hard to find compelling deals, and there is little room for error in deal execution. 

My concern is that the business having such a low % of tenants that complete the process that it seems as though a good part of the reason that RTO / Lease option is so popular is that the failure rate is what is driving profits. 

If you finance 50% of the property (with a non-recourse loan), then 50% of the NET profit is taxed after you deduct all expenses and, yes, depreciation from the portion you financed. 

I've been told they can be extremely profitable, but I seem to be missing the point.

If you are unable to predict your future profit (IRR) within a certain degree of confidence, that's when it becomes speculative. 

So if we have $100 of profit and I own 1% then I get $1 at the end of the year. 

With these entities, any profit earned from the rental activity is “passed through” to the owner or owners’ individual tax returns and they pay tax on it at their individual income tax rates.Thanks.

To keep it cleanest, I would think your sibling should pay market rent for the separate business space and they get their share of the profits from the building as a whole per your agreement. 

Own one home and just signed on a second for a tiny profit.