BMW E36 engine reliability guide
When you are shopping for a car as old as the E36 generation 3 series, it makes sense to choose the model that will be the most reliable and require the least maintenance. Here's a rundown on the pros and cons of most of the engines available (in Australia).
M40 - 4 cylinder sohc 1.8 litre
Not one of BMW's best engines. It has a timing belt which needs regular replacement. Suffers from top-end wear.
M42 - 4 cylinder dohc 1.8 litre
Originally introduced late in the previous E30 generation life cycle, this engine carried over the E36 coupe with a few changes. Uses a double row timing chain that lasts well. Valve gear can get a little rattly but is no cause for alarm.
M43 - 4 cylinder dohc 1.8 litre
The replacement for the M40. Fitted with a timing chain. This seems to be a reliable engine, for the most part.
M44 - 4 cylinder dohc 1.9 litre
The replacement for the M42. Still with a timing chain. Valve gear improved with roller rockers. Fitted with some plastic coolant pipes which disintegrate with age. One is at the back of the engine which is difficult to replace without the engine or transmission out (replace it if regardless if you are doing this type of major work). [Edit: I have since been told this pipe can be replaced by only removing the valve cover]
The M44 also suffers from a leaking oil filter housing gasket. If you are leaving a lot of oil on the ground where you park then this is the most likely cause. Fortunately they are fairly easily to replace.
M50 - 6 cylinder dohc 2.0 litre and 2.5 litre
Fitted with timing chain. Later models had variable valve timing for inlet valves which can be problematic but early models (1991 and 1992) didn't. Strong iron block with aluminium head.
M52 - 6 cylinder dohc 2.5 litre and 2.8 litre
Replacement for the M50. Fitted with timing chain and variable valve timing on both inlet and exhaust valves. Aluminium block which means that it doesn't like overheating and head gasket replacement can result in stripped threads. Some oil consumption problems due to either Nikasil cylinder linings, bore glazing or oil separator valve. Many engine blocks were replaced under warranty.
Like most of BMW's VANOS equipped engines, the M52 can suffer problems with this system.
Summary
All BMW engines have a reputation for needing regular cooling system maintenance. Personally in more than a decade of BMW ownership, and around 7 different cars, I have only had to replace one water pump. However, I have had to replace the thermostat in almost every BMW I have owned. I have never had a problem with overheating.
In my opinion the best choices are M42 or M44 for 4 cylinder models, or the M50 for 6 cylinder models.
If you do want a 318i then I would strongly recommend you avoid the earlier M40 powered cars and find a later model with the M43 engine.