The E46 is a pretty rock solid choice for a car, provided you do a bit of preventative maintenance. Their achilles heel is their cooling systems - but addressing it early will save you major headaches down the road. I haven't heard about headbolt issues though - that's new to me. (have a link?) Not to mention you're dealing with "old car issues" like stuck/rusty bolts, worn interior bits, and sometimes not being able to get certain parts anymore.

I wouldn't kick one out of my garage - they're an absolute joy to drive. Modern ergo and creature comforts are big factors in cars for me now - for example, I'll never daily a car that doesn't have AC, nor will I attempt to daily any of my projects. I love wrenching and a good project, but I'm past the days of having to stay up till 1 or 2AM putting together a cooling system just to drive to work the next day.

To be honest, I'd pick up the E46 wagon if it checked out, and keep the W123 as a project. There's something to be said for having a daily you don't mess with and a project that you can really focus your time and effort on. I preached this to SirNik back in the day - I switched from trying to daily my W124 and bought a low mile W202 and never had to worry about wrenching to get to work. He woke up and did the same, and now focuses his car time on fixing/building something the way he wants instead of trying to "band-aid" it to get to work the next day.

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-Justin

91 560 SEC AMG - other dogs dd
01 Honda S2000 - dogs dd
07 MB ML320 CDI - dd
16 Lexus IS250 - wifes dd

it's automatic.