option 3; minus the touch-up.
ditto on the usued alloy rim/bmx freewheel combo. Get mom to bring the one from her basement next time she visits.

3 minus the touch up?? that thing really looks ****ty right now. nicks, peels, and rust spots all over it.

I know nothing about bmx freewheels but will look into them.

youre in Phila, right? Nicks, peels, and rust are advantageous
Goto any bike shop for a bmx freewheel. should run 10-20 bucks. No special tools necessary to install (though needed for removal)

they are advantageous, but I also want the thing to look good. or at least better than it does now.

so I can put said freewheel on any old hub?

any FREEwheel hub (any track hub or older road hub like the one in your 'rents basement). If you get a newer (cassette) road hub, scratch the freewheel and get a cassette cog and a pile of spacers.

Yeah Laura just use those old wheels off the Nishiki. You won't see much advantage to getting a track wheelset if you're not going fast. Plus, you just have to get a freewheel. You might need your bb spindle flipped, maybe not. As far as paint goes, the frame is more cute than it is a fantastic piece. If you really love it, drop the $100 on the powdercoating. Otherwise you might was well leave it as is, since it's still pretty rad. Needs risers and a basket. :)

I have the front wheel off the nishiki so I'll use that and find a rear wheel from somewhere around here.

as for the paint job, I don't want to spend $$ on it, but I want it to look decent/nice, and I dont' think it looks that way right now. a DIY spray paint job by me probably wouldn't look amazing either, but it might clean it up a bit/even it out.