Time is money and I prefer spending my time with my fam and friends instead of problem tenants and legal cases. 

This is assuming the way you notified the tenants of the new rent was considered legal notice in your market. 

What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.?

Quote from @Michael Smythe: @Sean Gallagher legally you are correct, but many tenants do NOT know this.We take over properties all the time and close 80% of existing tenants sign a lease with us.True! 

Hey Santosh,As of right now you're extremely exposed regarding insurance and I'm going to assume legally as well.If the home isn't registered as a legal multi-family with the town that's something you'll have to correct ASAP and make sure the home is up to code.Insurance wise as soon as they find out what you're doing they'll cancel you as the risk has changed from a single family owner occupied home to a multi family owner occupied home.

Since this approach relies primarily on true documentation rather than estimates, it is typically the most accurate.

Obviously one would still need legal and accounting support. 

We take ID's for all guests (in a website called Chekin) so would have documentation the booking guest is above 21.

@Tim Holt Come February, it's legal to create an ADU by-right on any single family property in the entire state.

But for large multi-family, that amount hardly covers your legal fees for one transaction, let alone down payment, due diligence costs, lender fees, other closing costs, etc.