with five thousand I'd turbo it... the only thing is that there isn't a turbo kit premade for it, but you need to buy all the parts separately and build it.
If you have mechanical skills, turbo experience and TIME (fundamental) you can diy and save a lot of money.
I have pieced my own turbo kit for my m44 but not enough time to do it now, and I don't want to took it to a shop

I have Neukin manifold
$650.00 (
http://www.neukin.com/ProductDetails.asp?ProductCode=neukinbm42bm), but if you do it buy the external wastegate version... I have the internal WG version but as what I see it will go too close to the gearbox (neukin's are bottom mount manifolds).
Neukin build them on demain, so it will take at least 4 weeks to have it.
but remember I'm insane... you could simply swap a 325i engine for 1/5 of money of your budget... the decision it's all in you;)
with a turbo and engine built you can go until 612bhp...

a 325 engine can do the same with less money...
high power m42 in N/A form it's all a money question... you can reach 200bhp, but a lot of work is needed. 200bhp with a a turbo can be reached with 0,5 bar/7-8psi without change an internal piece