the red paint you are thinking of is glyptal and is still available http://www.eastwood.com/glyptal-red-enamel.html
Any insulating varnish/paint will do; Spray-on, Toolmaster,etc. Just make sure surface is clean. A piece of 1/8" cable chucked in a drill works wonders for cleaning rust and scale. Don't go wide open with drill as cable can/will sneak out and clean you. You probably know not to chase bolt holes with a tap.
You can buy a thread chaser, but a grade 8 bolt will work. Use a cut-off wheel in a dremel to make 1-2 reliefs lengthwise through the threads.
I like the way you think.... My parents were old style New England Yankees.
" Use it up, wear it out, make it do, or do without"
I soak my water jackets with vinegar for a couple of days but not the machined surfaces.
I would put the heads back on with a old gasket say greased, then with it standing on end fill the block and heads with full strength Vinegar or molasses ,let that sit for min of 3 weeks even 8 .Then water blast ,you can degrease with Diesel or kero or some cheap solvent probe and water blast before the vinegar and after the machinist .dry it in the sun or a blow heater a little rust discolouration will not hurt ,or leave it covered in diesel while you wait for assembly . Ted