Efficient use of rental home equity

[Jonathan Thompson]

I currently have a prior primary residence being rented out the flows no cash but covers the mortgage.  It has approx. 12 years left on a 15 mortgage at 3.25%.  There is approx. 140k in equity at this time.

My original intent with this property was to leave it zero cash flow but own it out right for a few years, then upon retirement (military officer), sell it for the down payment on a retirement home in Tahoe.  My wife and I have excess cash flow and can easily accelerate the mortgage to be paid in 3-4 years.  This seems like an inefficient use of money.  I don't expect I'll ever be ever sell it for more than 425K in the next 7ish years and it generates $25k a year in rental income (0$ after mortgage and expenses).  Once it's paid off, I'll make $25000 a year and something on a property worth $425K.  I don't think I'll reasonably be able to raise the rent beyond this level.  That's a 5.6% gain, which I see as not desirable.  An S&P index fund should be able to match or beat that.  I realize the value of the property "should" improve over time, but this area will keep prices reasonable.

Would a very large down payment on a multifamily with a smaller mortgage make more sense?  The ultimate goal is to eventually own multiple properties.

Notes: It's been rented for 9 years, and has been depreciated the entire time. Net positive cashflow isn't necessary at this time (I have a good 401k, Roth IRA, and military pension for retirement).

I'm glad I found this site.  Tons of useful info.  I appreciate any insight from all you who are more experienced than I am.

Thanks, 

John