NEWBIE need help understanding Seperates V Receive

Separates versus an AVR? Conventional audiophile wisdom is to denigrate receivers as inferior to separates. Receivers have really improved in the last several years and thre are many that sound very fine indeed. They are also easier on the budget and living space.
Whatever speakers you pick, check their sensitivity and impede nice to ensure that your AVR has enough power to drive them.
Another advantage of AVRs are that they are upgradable. You can use the preamp outs to add a better power amp, for example.
Regarding individual components, such as speakers, you really do have to listen and make your own choices. My tastes may differ wildly from yours, your listening room may have a major impact, etc.

John, welcome. This forum is a bit lower key and less critical but there can be good information in all the disagreement and bickering if you can get through it.

I sense some confusion in your second post. No, you will either use an Audio Visual Processor (AVP) with a separate multi channel amplifier or an Audio Visual Receiver (AVR). Most AVR's have pre amplified outputs to use an outboard multi channel amplifier if you choose to later on.

Integrated amplifiers are usually a two channel pre and power amplifier in one component. Mezmo has done a good job of laying things out for you. His bias is towards two channel music listening, so is mine.

You mentioned you will be using this system for home theater and music equally in a small room.

Your first consideration should always be the room and speakers you choose. Together they make up the majority of what the system will eventually sound like. In home theater there is no substitute for a subwoofer. It is the .1. That said, the need for floor standing speakers in such a small space is not necessary.

A general rule for used audio at this level is some where around 50% of retail. Some may consider Arcam a premium Audio Visual Receiver. They have been known for slightly better sound quality but I find their Speaker Setup a bit dated. For instance, in their manual I see your asked to input speaker distances. In modern room correction this is done acoustically and then can be manually adjusted if need be.

I'm on my second HT from 5.1 to 7.1 in a small space. My first setup was using a 5.1 speaker set that used matching drivers but different enclosures. I've since replace the center and rear's with 7 all matching speakers. The improvement in surround balance was substantial. No room is too small for 7.1 just go a bit smaller on your speaker selection. While there is little in the way of 7.1 media so far, the matrixing effect in most modern AVR's and AVP's is very good. With an actual 7.1 production the effect is outstanding.

Rotel makes decent mid level components

Rotel RMB-1075 - 5 channel amp - 600-700 used
Rotel RSP-1570 - Pre Pro Pocessor - 850-1000 used
Oppo Bdp-93 - mutli disk player - I would by this new as I am not a fan of buying used disk players.

add your speakers & sub of choice and you'll be good to go for 5.1, have fun.

You can add a 2 channel amp and 2 more speakers when funds allow for your 7.1

I ran a rotel system for awhile and was quite happy, I used Paradigm studio and it did sound very good

Rotel RSP-1570

Separates do offer benefits in that you have complete separating between power supplies, low current circuits, video circuits, etc. Plus you have great flexibility to add to your system, expand it, or change it. Moving and getting a big room so you need more power?, just change the power amp. This is all great, but it does come at a price. Basically, you need to add another chassie, another power supply, additional power cord, etc. etc. it all adds up quickly.

A receiver on the other hand will always be the most cost effective alternative, basically, you will get much more for your money. Yes, separates can offer some benefits, but the difference can be surprisingly small. You do give up some flexibility though.

If it was me and money was an issue (which it's always for most of us...), I would spend the money on the best possible receiver you can get after you bought the speakers you want. Make sure that the speakers and receiver do sound good together. Very bright speakers and a very bright receiver can be too much... opposite it true as well of course.