The manual transfer case will grind if you're slow to shift between low and high range, even with the transmission in neutral. There's enough drag in the transmission clutches to spin the output if it's not being held by anything, and when the transfer is in neutral, there's nothing holding it. If you're slow, it spins up and grinds when you try to couple it to the transfer output, which isn't spinning. If you linger in neutral, and it won't to back into gear without grinding, you can shut the engine off, finish the shift, and then restart. It shouldn't grind if you're quick about it. I've fumbled and barked mine a few times, but if you shift quickly from low to high, and it grinds anyway, every time, then yeah, something ain't right.
The 4x light not going out as soon as you move the shifter isn't unusual either. When you move the stick back to 2HI, you're not actually pushing the selector out of 4x, you're allowing a spring to return it. I think this is to prevent you from reefing on the shifter when the transfer is under load (or torque-bound) and damaging the shift fork or the splines (like trying to pull a manual out of gear without letting off the gas or pressing the clutch). You move the stick when you want, and the selector should pop back when the load across it is released. My '95 was balky about disengaging 4x until I changed the transfer case fluid, after which it was fine.
I don't know what percentage of R50s burn oil, but I know my dad's '03 did. I never opened it up, so I don't know if the screws fell in or the valve stem seals were shot or the bores were tapered or what was wrong with it, but the damn thing used a quart/1k miles before it had 100k on it. He had no idea it was burning oil until he noticed the lifters making noise and checked the oil level. The dealer certainly didn't mention it. (I assume the oil consumption was why someone traded it in, and I doubt they said anything, either.) I can understand being skeptical of a rebuilt engine, but if whoever rebuilt it knew what they were doing, it might still be worth considering. They may well have done a better job than Nissan did.
The VQ R50 slushbox is a good unit from what I've heard. I haven't heard any complaints about the manual, either, though if it's the same box the earlier trucks used, you have to be careful about what kind of oil you put in it.
A more basic truck with manual controls means there's less to go wrong, which is not a downside IMO. Speaking of which, the '03-'04 trucks got drive-by-wire throttle bodies. My dad's '03 had just enough throttle lag to piss me off. If I had to get a VQ, I'd look for an earlier one.
Look for rust around the front strut towers, that was a big issue on the R50s.
Good luck!