Well, I'd personally just do a 325/8 or M3 swap. Yůu'll have more potential out of the box. You'll need to upgrade the suspension anyway, but are you planning on keeping your car at stock height forever?
Regarding the brakes, 318 brakes are the same as 325 brakes, so you should be ok for a while there, just get some decent pads, if you want to move up to M3 front brakes you can get a set for under a grand. Upgrading the rear brakes isn't totally necessary.
Getting a lot of N/A power for the 1.8L isn't really an inexpensive possibility, plus once you do it, you're car won't be very streetable. Especially since you'll spend a whole lot less money just dropping a 2.5L in there.
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