We have twins in a 3 bedroom townhouse. Want to agree with PPs who suggest having the twins sleep in one bedroom, and have one bedroom be the playroom. When our kids got to elementary school, we then made the shift to each of them having their own bedroom. We have a postage stamp backyard, and a pocket park halfway down the block, really nice flat grassy spot that we don't have to mow
For years 1-5 it was kind of a pain to not have big back yard, because anytime they went outside someone had to go with them, but now they can just go over our street's pocket park and play there, or ride their bikes on our flat, quiet street.
One thing to consider is how long you want to stay in a house. When we bought, we knew we wanted to "stay put" so we weren't just thinking about what would work best for toddlers, but what kind of space would average-out to be the best situation for our family over the years. (We lucked out that this was our preference anyway, since many folks who bought thinking they would sell in 5 years got hosed by the downturn in the market.)
Lots to think about. There are pros and cons to every situation. You have to weigh them and figure out what works best for your lifestyle.