Your considered opinion is sought, please.

Hello All! I’d like your advice on which of the options I’ve listed below (if any) is the more preferred. Firstly I’d like to summarise my current situation. The family home is worth approx $450,000 with a debt of $120,000. We have an IP worth about $260, 000 with a debt of $120,000. Due to a terminal illness, I’ll be inheriting the family home with a debt free value of $1,500,000. I wish to do whatever I can to make all the assets I have at my disposal work for me so that if all goes well, I may be able to work part-time (worst case scenario) or retire (best case scenario). I have been throwing 3 options around in my head that could allow me to achieve what I desire, however I’d really like to use the forum as a sounding board – if I may, please.  In no particular order, the options I think I have are: 
OPTION #1: Sell ALL of the properties, buy a newer and better family home and live off the interest that could be paid to my wife and I monthly. 
Pros:  Cash investment would be in the vicinity of $1.5m after allowing ~ $600,000 for new house, fees etc.
 No mortgage payments required to be made.
 Annual income from $1.5m invested at 8.5% could be $127500, giving my wife and I each an income of $63750 or just over $5300 per month – much more than we earn now combined! 
Cons:  3 properties that will appreciate in value surrendered and only one property now owned.
 Possible annual tax bill in excess of $58,000  
Comments: I really have no idea what sort of an interest rate $1.5m could attract – I’ve only used 8.5 as a ‘guesstimate’. I’d not be too happy – and I’m sure that this is something you’d all agree with me on – with just handing over in excess of $50,000 each and every year to the federal government!   
OPTION #2: Retain all properties. Use the equity in the family home to acquire 4 or 5 properties in the $250K to $350K range where those properties are located in the Eastern States. 
Pros:  All properties retained and increasing in value over time.
 Rental income incoming from the 4 or 5 new properties, the investment property and from renting out the family home.
 Number of properties owned increases from 3 to 8. 
Cons:  8 lots of rates needing to be paid.
 Possible shortfall in relation to the percentage of rent income coming in compared to the percentage rate to be paid on the borrowed money.  
OPTION #3: Retain all properties and simply rent out the family home thus providing us with a small income stream. 
Pros:  All properties retained and increasing in value over time.
 Additional rental income from the family home assisting the household income. 
Cons:  Unable to take advantage of $1.5m equity. 
OPTION #4: Similar to OPTION #2, but equity in the family home used to acquire 3 properties in the Perth metro area that my sons could make use of at a later date as they (and others) of their generation do not see a way for them to become property owners.  
Pros: All properties retained and increasing in value over time.
 Rental income incoming from the 3 new properties, the investment property and from renting out the family home.
Number of properties owned increases from 3 to 6. 
Cons:  6 lots of rates needing to be paid.
 Possible shortfall in relation to the percentage of rent income coming in compared to the percentage rate to be paid on the borrowed money. 

So there you have it.

Any thoughts you may have in relation to my situation would be most appreciated. 

Regards, 
Mobydick.