Demolition and reconstruction or renovation?

oops the first sentence is incomplete.
I would get quotes for what a renovation costs.

For me personally, I would see 2 reasonable options in your case.

For both options applies: Enlarge your garden by at least 1/3 to about 1/2 of the new property and garden it for yourselves! Another advantage: if needed in 15 years, this area is optimally usable for new construction, e.g., of a bungalow.

Option A: Do a few cosmetic repairs and rent out the old little house (cheaply) with the considerably smaller part of the property. This way you have time to consider exactly what makes sense to do with it. Through the rental use, the still existing building fabric is preserved. (For a possible later renovation). Moreover, your children have the opportunity in 5-10 years to either renovate a house nearby the parents or to build a new one on the property. And yet the previously available living space is currently used.

Option B: Demolition and new construction of a 4-5 unit apartment building. When designing, make sure that your garden view to the south is not greatly affected and that tenants cannot look onto your terrace. As builders, you can actively take this into account. Advantages: Use of current low-interest rates, creation of living space, income property (for you and your children), possibility for children to possibly use an apartment themselves in a few years.

Option A of course also leaves you the option to go for Option 2 in a few years.

Well then everything is clear: 1. (simply factually with fence relocation, without replotting the properties!) shift the boundary between the gardens, make sun-permeable privacy screens with bean poles, rose arches, or similar trellises facing the old little house. 2. Keep the footprint of the old bungalow free from development, use it as a rented garden in the meantime. Possibly I would also make a little garden gate to the driveway of the old little house, so you have a second access. 3. Renovate energetically as needed, make sanitary and kitchen installations fit for a maximum of another two decades, nothing more. I could imagine just keeping the roof weatherproof, using the attic as storage space and declaring it so, sealing the thermal envelope with the ceiling between ground floor/attic and renting out only the ground floor – I wouldn’t expect something like sarking insulation etc. to be worthwhile for an additional apartment to rent. For rent-free years and a termination by you at the earliest in ten years, the tenant should adapt the interior fittings to his wishes himself. In ten years you think about extending the rental and its conditions, in twenty years you tear it down, and the little house frees the floor area ratio and front garden area. This way you have decay protection through occupancy in the meantime, the substance’s preservation does not become a burden for the mortgage value of the property, and the building ground of the old bungalow remains untouched. The tenant pays only ancillary costs and a small amount for financing the necessary energetic and sanitary renovation for several years, makes it "nice" at his own expense, and everyone is satisfied or even happy. The investment is very manageable, no gambles fall against future chances. And if they have not died, then the Brothers Grimm or something similar are happy.

Plot with ... an old house from 1952, ... has hardly been renovated in the last 70 years, ... bathroom (you have to go through the kitchen to get to it - let's not talk about that...).

Our approaches:

1. Renting out in the current condition:
Pro: loan could be serviced 1:1

nothing relevant has been invested in the last 70 years, just paint is not enough...

along the Mosel ...
along the Saar from ~Sarreguemines to ~Saarlouis
along the Rhine/Rhine Rift Valley from about Rastatt/KA to Koblenz/possibly Andernach/Neuwied
maybe along the Main from Miltenberg to Hanau