suggestions
That old masonite is nothing worth saving and is not a good basis to build on anyway. You'd be well suited removing it and replacing it with something else. As you say, this would give you a good view of what's in the walls, inclding inspecting and upgrading wiring if needed. Sheetrock is quick and not too difficult. You could go with paneling (but it should have something more solid under it) or even v-groove pine to make a nice finished (campy) look but you should use a finish nail gun for v-groove. You can just do a wall at a time as you can afford it, and end up with something you can be proud of when you're done.
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