It really is impossible to give you definitive advice without a clearer picture of your entire income/expenses, complete savings, retirement goals, etc. All of the choices you mentioned could be potentially good, but without more information it is really tough to give you specific advice.
However, A property that is yielding ~7% that is also growing with inflation as rents rise, and that can give you capital appreciation seems like a pretty good idea to keep. If that house is paid off, and you can pay off the new house you are considering purchasing in the next few years, then not even counting any retirement investment accounts, taxable investment accounts, or pensions you may have, you could be very close to being ER'd just off of the cash flow from the house, depending on your level of expenses.
As far as whether to pay off the current house or put the 65K into investments or a bigger DP on the new house.... There is really not too much of a difference from a financial perspective between putting the 65 down on the new house or the old house. Since, you can not invest aggressively in the stock market with such a short holding period between now and the purchase of the new home, I would say that putting it down immediately on the old home would make more sense than waiting to put it towards a down payment on the new home. The choice between putting the 65K towards longer term investments is a more difficult decision based on risk tolerance and expectations. For me personally, with the market feeling a little toppy after a 7 year bull market, I would probably err on the conservative side and pay off the debt even if it is a low interest rate.
Again, it would be more useful to have a full picture of your situation, but this would be what I would recommend based on the information you provide.
