Assuming you have lived in your current house for at least 2 years, I would consider selling your current more expensive house and using the proceeds to either (1) purchase the cheaper house in cash if you want to live for free (personally at such low interest rates, I would not pay all cash, but there is something to be said for having no mortgage), or (2) using anything in excess of the down payment on the new house to buy other rental properties that may generate better returns (either in Denver or possibly out of state). You can always park that cash in an index fund, money market or savings account depending on your risk tolerance until you find the right rental(s). Even if you purchased the new house with all cash, you would have $150k to pursue other properties, invest in stocks, or whatever you choose. As the other posters mentioned, you need to determine what the return would be based on the net rents you would expect to generate after all costs are factored in. Given just the numbers you supplied (which doesn't factor in taxes on the rental income, depreciation, appreciation and other operating costs other posters have mentioned), it does not seem like a great return on $475k. I would look for a better use for the equity.
Congrats on building up that equity and being willing to downsize. That's not something that is easy to do, but sounds like you are in a good situation.
I live in a similar market where the 1% rule just doesn't work. I have started to look in other markets for rentals, but always keep an eye open for the right deal! Having funds available lets you act fast if it does come along.