NO!!! I use de-ionised water instead of tap water - to ensure there are no dissolved minerals in it mixed with the recommended anti-freeze.
As an aside, I looked into this a while back and for optimum heat transfer the water/anti-freeze mix has to be in a given range, in other words you cannot use 100% water or 100% antifreeze.
re. engine rebuild - that is nearly 20% larger. Unless you modified the engine or have managed to rewrite the laws of physics, the efficiency of the engine would be unchanged, in other words I would expect it to generate 20% more waste heat.
I do not know if the stock radiator, bearing in mind this one is 30+ years old so could be crudded up inside, can handle that?
The gauges are not accurate so should be used as an indicator - when stationary, the needle will rise, the fan kicks in and it should turn off after a while with the needle dropping a bit.
An easy thing to try is to add water wetter, an example below:
the claims are:
- improves heat transfer and reduces cylinder head temperature
- Compatible with new or used antifreeze (including DEX-COOL® and long-life versions) to improve the heat transfer of ethylene and propylene glycol systems
Note I tried a similar product in a car engine and am not convinced it made any difference but other people swear by it.
I would recommend you have a peak inside the radiator to see if there are deposits in the channels - this may require it to be removed but a $5 endoscope the connects to a phone would make life easier.
Incidentally for the price of 2 thermostats, you can get an after marker all alloy radiator, again example posted below.
( This radiator is heavy duty designed, cooling capacity is increased ,really well packed, exceeds OEM spec. )
One thing to try is to remove the thermostat and run the engine when stationary on a warm day. If the fan never turns off, then the system is not capable of cooling the engine so we're looking at step 5 and beyond.
So my recommendations are in the following order (and in cost!)
1. check the valve position
2. flush out the system - see example product
3. refill with de-ionised water and recommended anti-freeze
4. replace thermostat
5. remove water pump to check it out
6. look at fitting upgraded radiator