You need to get the flex shaft that goes with the Dremel. That way you keep the motor away from any water.
Harbor Freight sells a cheap assortment of diamond bits http://www.harborfreight.com/diamond-point-rotary-bit-set-20-pc-69653.html
. You can either set up a water drip to work under or do what I do, just dip the piece you're carving in a shallow dish of water.
I don't have any new cabbing equipment. You can sometimes get the old machines cheap, but you often have to put quite a bit of work into them.
If you come across an old one, turn it on and see if it runs true. Sometimes the arbors are out of whack. If it has a diamond wheel that has any life in it, great! Even the cheap ones are pretty pricey. The Expando wheel is fantastic, and you can make your own diamond belts for a fraction of the cost that lapidary sites ask for them. Search for "Hysol" on this site; I gave instructions a few years ago on how to make them. If the machine has an Expando, check the rubber to see if it's still in good shape. Likewise, listen to the motor.
I wouldn't buy a machine that had a bent arbor, and yes, I have seen them for sale. It's too difficult to find a replacement and too expensive to have one turned. I have some motors laying around, so if it had no motor or a bad one it's not a deal breaker. They're pretty easy to find at garage sales. With an older machine, it's almost a given that the bearings will need to be replaced. Buy plenty of penetrating oil, you're going to need it. That, and rust inhibitor.
One thing to think about: If the manufacturer is still in business it makes it ever so much easier to find replacement parts. I have a machine that was made by a lapidary shop in Arkansas that's probably been out of business 40 years and the spacers and wheel nuts are impossible to find. I had to get really creative, and frankly, I don't like working that hard.
I strip mine, paint them and seal them with fiberglass. I hate rust.
I've done this on the cheap, too, and I now have more tools that I can even use. Let friends and family and even casual acquaintances know that you're interested in doing lapidary and grinding rocks. They may have had an uncle that was, too, and sometimes when rock-hounds die, families don't know what to do with their stuff. Trust me, you will start finding things. Look at the offerings on EBay, Kingsley North, Lortone, etc., to get an idea about what to look for. But most of all, have fun!