Hi Simon,
I would agree with Jason that most milling operations can be done on the lathe with a vertical slide.
You can do quite a bit on the initial stages with just a bench vice, hacksaw, and files. You really need a pillar drill for drilling the frames plus a decent set of number or close metric drills. Decent set square and centre punch etc. By the time you get to the hornblocks a vertical slide for the lathe is required or a vertical mill plus endmills.
Then it's the axles and axleboxes which is probably the first turning in the lathe. Then the wheels which is first turning of cast iron… and I could go on.
There are some excellent descriptions of building locos in 3.5"g and 5"g for beginners. Read as much as you can from old editions of model engineer. My favourite is Don Young's description of building the Railmotors in 1968/9 in ME, but I may be biased as this was my first loco in 1983, plus was a close friend of Don.
Join a local club which may have workshop facilities plus lots of experienced members and help. I didnt have a workshop of my own till 1985 with a pillar drill and lathe, yet had a rolling chassis by 1984 thanks to the use of other club member's workshops.
Cheers,
Julian