Welcome to the zone!
Get yourself a test drive or two and you'll soon love these cars

The bad news is that your budget is a bit tight for a 325i in good condition. That said, if you find a straight, rot free shell then get it and replace the bits as you go. Apart from rust, look out for corroded brake lines (especially the rear ones which are routed over the fuel tank), knackered rear subframe bushes (check for MOT advisories, most garages seem to give a bit of warning on these, possibly because it can be such a bitch of a job), and check for fuel leaks - especially when the tank is full (the fuel filler neck into the tank can rot).
Most jobs on these cars seem to be have been done by someone on the zone, although that doesn't make everything DIY - it just means there's some really gifted mechanics on here that you can badger for advice
Oh, and never overheat an M20. If it is heading towards the red - shut if off before it gets there or you could be looking at a cracked head. Incase you're now thinking "what the hell is right with these cars???" I just walked to my 325i Touring on a cold damp, freezing day and fired it up for the first time in two weeks. First crank, up she came into a steady 6 cylinder idle and pulled away as smooth as silk. Lovely
