I live off-grid, and built my house a few years ago with a 5500 watt Chinese Yanmar clone. I bought it used for $600. It is a 3600rpm unit, so a bit noisy, but very efficient, using about 750ml of diesel an hour. After building the house I sold the generator to my Dad, and he's still using it, and has had no problems. I'm currently running a 6hp Lister, circa 1970, driving a 3500 watt generator head. I picked this one up for free with very low hours on it. Fantastic, simple machine. Still available fairly easy used, and new parts can still be had quite cheap. Unless you need tons of power, I think a Vw diesel would be overkill, and fuel economy might suffer.
I have a tiny microhydro system, putting out about 25watts@12volts. This charges my battery bank (4 6volt 220ah golf cart batteries) during the winter months and powers my lights, washing machine, computer, stereo, and most of my shop tools. In summer I have 400watts of solar that provides most of my energy needs. My generator only gets started to run my welder, compressor, or during the "shoulder" season when sunlight is low, but the creek hasn't started to flow yet.