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That is the one i have, i love it a lot. I was bumming off a friend with an older 395, finally went out and bought my own.
The dremel is neat, i use it a lot for almost anything.
speed is important, it NEEDS to be variable speed, it just makes projects so much better, price is price, i would get a dremel brand rotary tool as i've never really had problems with them.
Despite what some people have said, i have nothing but positive things to say about the cordless dremel. It isn't compatible with ALL dremel accessories, so be forewarned, but i've found battery life to be sufficient. I borrowed my roommate's (from last year) and it lasted me ~3 hours with moderate use. Obviously if you're going to be working longer than that, go for a corded one. I have a long extension cord to get mine around.
the flex shaft is a really neat tool, you'll find it's quite the useful.
as for the sandpaper on drywall : painters do a variety of thing. Some have actual high grade sanders that are sealed/ventilated well enough so they can use them. I just used sandpaper, usually the 3m sandblaster pads (not the bricks). 3m uses a material they call cubatron and what it does is splinter 3x more effectively than regular alluminum oxide sandpaper. This means you'll get a better finish, the pad will last longer, and it doesn't clog as much. The mesh papers are also excellent, but i've used the sandblaster pads a lot more.