Outside taps are another loss.

I would say only the most experienced investors (talking accredited here that can afford a complete loss) should be in this game and only if their emotional makeup can tolerate it.  

I have seen on this website answers both ways regarding this (the site administrator saying leave it in Sch A, and his colleague (also a enrolled agent) advising that it can be written off in Sch E, but that there are certain restrictions mainly -- you must have passive activity gains where the deductions are covered (no passive activity loss carry over allowed. 

It's ok to work at a loss or break even, if you make it up in volume.

You have zero equity the moment you start, and zero equity when you get to the balloon payment.You are simply delaying the day of reckoning when you have to buy the property for a short term gain in cash flow and tax loss.

If the last two years of tax return show a net loss (because of depreciation etc), does anyone know how it impacts this calculation?

I can't be the first person that's done this for sure.I have an LLC setup with partner(s) with all the very specific terms in our operating agreement (Ownership Percentages, profit/loss, who's responsible for what initial costs, etc.) 

Losses?

It depends on overall profit levels (for example, a $50,000 salary on losses or profits less than $50,000 would not make sense).So here's what I do... 

Do you clients that self-insure keep a reserve in place in case of fire and total loss?