Best way between Portugal and Spain

You've discovered what many of us have learned: there is no good way to go between Spain and Portugal. The car is so pricey because of huge drop off charges. So flying is the best option. You might look for flights into Sevilla or Malaga and avoid the time and expense of the AVE from Madrid. Idealy you'd fly out of Porto too since the train to Lisbon is a few hours. But in any case, you are on the right track.

You can always do the 2-car exchange on both sides of the border - it can get complicated, but the savings are substantial. We picked up car #1 in Lisbon, drove it down through the Algarve for a few days, to Faro, and dropped the car there (the closest town to the border we could find that had a car agency). Took a bus from Faro to the border town of Vila Real de Santo Antonio, a small town right on the Portuguese/Spanish border (on a river). Walked from the bus to a small foot ferry, ferry across the river to the small Spanish town of Ayamonte. Walked from the ferry dock to the bus station, got on a bus to the town of Huelva, the nearest town in Spain to the border that we could find with a car agency. Picked up car #2 in Huelva and drove off to the White Hill towns. It was a complicated day but it saved up something like $600, so I was willing to do it (plus, I always enjoy a challenge). On my next trip, I'm planning to do something similar (though less complicated) dropping off one car in Slovenia, catching a bus across the border into Croatia, then will pick up a different car there.