E36 hands down!
-cheaper car to get started
-more reliable motor (redline of 7000rpm vs 8600rpm)
-cheaper motor to replace if blows ($2K vs $4K)
-lighter, not even close. I have seen many 2400lb E36 and rarely see an E46 under 2700lb.
-the suspension geometry is about the same
-parts are a little cheaper
-If you start upgrading an E46 much, you're close to Corvette weight/power and will be competing against them
-very easy to work on
-SMG not available which would break anyway
Not bagging on the E46 because its a great car too:
-Prettier body (let's face it, the E36 is kind of ugly)
-Faster car to start
-great handling
-6MT available and can swap in a the lighter 5MT from the E36
Keep this in mind: if you get tired of the paltry US S52 (S50), you can always swap in an S54. (very easy to do, costs $8K total with engine)
An S54 powered E36 will ALWAYS be faster than a comparably equipped E46 M3. The two fastest cars in my race car club are E36's:
Phil Buffington has an ultralight E36 with still uses an S52 engine with just bolt ons. He only has about 240whp, but his car only weighs about 2300lbs. Basically he just wears everyone else down and eventually passes them. Watch how the more powerful cars pull away on the straights but Phil catches up to them in every turn.
Greg Dalgarn owns his own highly respected indy BMW shop and also runs the E36 chassis in race group. He has a built S54 motor (reportedly cost $40K) in it and is wicked quick. Greg's just in front of Phil in the above video also.
My own race instructor/mechanic (Leroy Moore) loves the E36 chassis and claims the fastest car on track is an S54(or LS) powered E36. Basically is unbeatable. He made most of his fame and wins in an ultralight 150whp E30. Lighter weight trumps horsepower on a road course.
http://602flatout.com
Yes, I drive an E36 and love it. at only 218whp its a challenge to beat well driven higher horsepower cars. I play with Todd who has an S54 powered non-M E46. He beats me more often than not, but on this day I threw on a new set of tires and had his lunch:
Nothing is more gratifying than wearing out a Corvette guy in your 240hp car. This guys is actually a pretty good driver and he did a super sweet drift while passing me on the high speed left hander. Ultimately I wore him out in the turns and he had to let me go after about a lap or so.