Plenty of kz650 builds on here to look at and get ideas... Mine is below in the link. Also use the search function for kz650 and it should pull several results.
The guys at forums.kz650.info are very helpful. They have a ton of information on everything including finding the CORRECT factory service manual as Kaw made one for about every different series (B, D, C, F, etc.) bike. Find the correct manual number and scout ebay or use repairmanual.com for a reproduction (copy).
You should have pumper carbs on that model. Decide weather you will convert that to non-pumping carbs or rebuild the pumps on your bowl... I kept my pumps and rebuilt them. rejetted for K&N pods as well. One of the diaphragms is expensive and I can't remember which one. I bought OEM parts because K&L sucks at making diaphragms and orings to factory specs.
Like Rex said, you could do some maintenance things and clubmans and have $300 into it or you could do a lot more but end up with several thousand into it... Do what you want to the bike based on your liking and amount of money at your disposal.
Watching. Excited to see what you come up with!