We have done this several times, both as an adult couple and twice with our grandson (at age 5 and 7). We love it, relaxing and fun. Kids love trains and our grandson was no exception, found it very exciting and the dark tunnel spooky. Many kids do get tired out on the return trip and fall asleep, not necessarily a bad thing
They have greatly curtailed the train schedule this year which is probably financially hurting the town of Dillsboro significantly. Lots of fun little shops to explore while there. Can't speak to the hotel issue as we live in nearby Asheville & just drive down for the day.
The open car is the way to go, much more fun and wonderful to feel the wind in your face. You can also see much more and it feels more like an adventure, especially for children.