Knock down & build 2 townhouses

Really? I've never heard of that before, are you saying that new builds could be cheaply built or something?

 

In addition to the above also consider your numbers carefully:
Very, very rough guides;
Say you pick an average middle ring suburb:
Purchase price plus legals, stamps $800k
TP fees, architect/draftsman, council fees $75k
Holding costs $75k (at least 2 year project end to end)
Demo costs $20k
Build costs $600k-$700k (say 2 standard townhouses)
Selling, staging fees, council contribution, GST $??? (Depends on sale price, margin scheme)
Can you find something that you can sell your end product well above all these very rough costs to make it worth your while?

To stress, these numbers are just to start you thinking, they will vary depending on where you are buying and end product required.
It is possible for a good result, but any old site purchased will likely not yield you the result you hope for first up.
Good luck with your plans but as others have stressed, be careful & do lots of d/d.