QUOTE(smj @ Jul 22 2012, 08:40 PM)
I'd suggest you get it in good running order for now if it isn't, addressing any rust issues you find. Then take the time to read up on the many, many different drivetrain options available.
If you haven't driven it, you may find it quite enjoyable as is; if you have, you can better decide what your particular goal is once you're more familiar with the different options and approaches. The "build threads" on this site are greatly informative as well as very entertaining. You won't regret taking the time to read through them.
Rather than looking for particular rust spots, get familiar with the whole car. Get eyes on everything you can see from above and beside the car, wriggling around as needed. Make sure you don't see anything indicating it's unsafe to jack it up so you can get a look from underneath. (Please use multiple, reliable jackstands if you're going under the car.) Knock on things to make sure the metal sounds "sound," and keep an eye out for any wrinkles or blisters under the paint. Depending on your tolerence poke any suspect areas with a screwdriver or point.
You might want to contact your father's mechanic assuming he used one, or pay a shop familiar with the 914 for an inspection - money well spent to either find trouble, or gain confidence that the car's in good order. If the car has been left sitting for a while, you might want to have them change the fluids, filters etc at the same time and they might make the price more attractive.
Make sure the frame is solid, get it running and reliable, then contemplate more omph.
Is the car currently in use or has it been sitting for a while? Has it lived in the North East most of its life?
There are a number of areas that you could check for rust. It sounds brutal but an ice pick/awl is a useful tool for that exploration. These cars can rust from the inside out, expecially in the longs. The ice pick will go through where the metal is super thin but not yet completely perforated so the rust would show.
Places to look (but don't just look here - like smj said - go over the entire car):
Peel up the carpet on the drivers side threshold. Only need an inch or two. Poke around close to the floor particluarly where there is the indent for the handbrake.
Have a look at the rear hoist points. There are two levels of steel there - the donut and the long in behind. Crap that holds moisture can accumulate there and start the rusting process.
Take off the side skirts and poke around the longs. It is almost a given that the jack points will be badly rusted. Not really a concern but if it has spread to the steel behind then you have some work to do.
The floors are covered in thick tar. If the floor is rusting you won't see it unless you are really agressive. There are drain holes under the floor mat. Have a good look around them - that's where it will start. It can also get going under the front right of the passenger foot well but that is hard to inspect.
If you pass those areas without significant concern you are probably not going to find anything serious elsewhere.
Keep your dad's legacy going!