If you keep separate books and you run things properly, this is easy.Think of it this way:  an LLC is like a basket of eggs.

Yes, you need to do proper accounting.  

I just do month to month, so as long as she provided proper notice, I'd let her go. 

I am guessing I need to get a business entity established with proper lawyer/accountant/property manager set up before I buy.  

Unless you think that $500/door tenants always behave properly...4.

It wasn't their job to make sure you did the purchase/letters of estoppel/assignment of lease properly.

Used properly it can be efficient.

Once you work out all the numbers if you find out you can do it legally then of course check with your insurance to see what kind of policy you will need to have the new or remodeled structure properly insured. 

I called my accountant right away when I found this out and he stated it had to be done that way because of new program or something the irs is using, taxes would not allocate properly or something.

Hypothetically your rich uncle could loan you the money and secure it against the house legally, but he cant be engaged in that activity as a business without the proper license and without following some pretty strict rules.Very few HMLs are licensed to loan to owner occupants.