Thanks everyone for your suggestions so far.  BTW I have rang the council up and told them what I wanted to do and they seem ok with it in principle.  I didn't have any plans to show them I just explained what I ws planning to do and they mentioned that there were no overlays in place that would prevent me from building a townhouse at the back.  Of course I will have to abide by rescode , etc etc.

The front house is currently tenanted .itsa 3 bdrm and council says that I will need 2 car spaces at the back if I was to build in the back yard.  Does that mean I need to get the carspaces and crossover done first before I build at the back? or will council allow me to do that after the build is complete and still letme rent the front house out?

BTW I saw a guy from National Builders group and they do small townhouses as well.  Looks like a 23.8 sq dble storey townhouse is approx $209,000.