Rent of $2k would cover mortgage, property taxes and insurance but no excess cash flow.

Your wages were subject to employment taxes (FICA withheld from your paychecks and remitted by the "employer" + the employer's share of the payroll expenses); however, the excess profit is not and, therefore, escapes SE tax.

So that they can be billed for excessive use?

When you refinance, the bank pays off your private lender at the refi closing and sends you the excess funds if any. 

It sits excess to your landlord policy and picks up where the LL policy leaves off (usually $300,000).  

That seems pretty excessive on top of their pricey rates. 

The benefit of having less equity in the property may later be accepted even though the equity in the property has been reduced and no longer available to other creditors.Equity stripping or skimming is a whole different animal and occurs when excessive fees are charged in a preditory lending scam, or where equity is transferred to someone who is to acomplish a service in connection with a foreclosure or bankruptcy, such as a promise to save the equity for a homeowner who is about to go into foreclosure.If you use a note and deed of trust to transfer equity as a method to reduce equity between related parties, you really need to see an attorney, do not take any such scheme off the internet or from a book.

Once I have enough reserve funds built up, I will start rolling the excess cash flow into future deals, along with my real estate business income. 

. $12000 to replace 2 systems seem excessive unless you go for top of the line 16+ SEER 4+ tons system.

For your reserves I'd make sure you have at least 6 months saved for all debt servicing and expenses before doing anything fun with your excess reserves.