I bought a 36 2dr sedan today "barn find" I was wondering if a 261 will fit in the car and what updates are desired for the drive train.

Yes, a 261 will fit. It isn't any longer than the 207 that came in the '36.

Nothing else in the driveline will be able to stay.
There is more than one way to set it up...

Do you want to run a stick or automatic?

How do you intend to use the car?

What other experience do you have with engines and drivelines?

What do you plan on doing to the engine?