you should be good for 1000lbs (if you have a 5 spd). the only problem with towing in an M10 is the rear drum brakes. maybe if you did a conversion to rear disc, but your crazy if you dont upgrade the brakes. the M10 can do a decent job towing 1000lbs but there is no way in hell it will stop in a decent amount of distance with the rear factory drum brakes.
as for the motor, get a bigger radiator, get the 325i front grills, or a 318 (M42) grills, they have bigger openings for cooling. a 4.27 diff would be nice but you should be fine with the stock 4.10 (if you dont go up any crazy hills).
that trailer looks like it might have alot of drag, have you seen the new teardrop trailers? you also might want to consider getting an ETA, they have tons of torque for towing, hope this helps

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