When logging in with a character, NWN automatically checks with a Master Server list and reports it can't connect. What about the character data then, will it be saved or do we have to start from scratch each time?
All the Master Server did was try to prevent the same CD key being used by more than one person, basically. Since it is no longer active, you no longer need a unique CD key to do multiplayer unless the host has set up something to check CD keys. Incidentally, every PW I know of has a system set up to check CD keys for that exact reason, which basically means that if you ever want to play on PWs you'll need unique CD keys and it won't matter otherwise.
Character data has always been saved on either the hosting computer (in a "server vault" -- meaning only characters created on that server can be used) or on the player's computer (in a "local vault" -- meaning you can use any character saved in the local vault in any module that allows local vault characters, so you can transfer them between campaigns). If that sounds a bit weird, all you need to know for now is that you can each save your character data on your own computer and use it for your campaigns -- but if you play on a server you'll only be able to play characters made on that server.
Is all this possible? Or is some content only single player?
All three official campaigns will work in multiplayer. There are also many custom campaigns that work well in multiplayer. I would highly recommend the Aielund Saga for that as a good first custom campaign (it's one of the best if not the best campaigns overall -- better than the three official ones). Mines of Twin Summit is also good (but starts at higher level which isn't good for someone new to the game). The Penultima/Penultima Rerolled/Eternum series works in multiplayer but those are also mainly story based modules with little combat, so being single player versus multiplayer won't really matter. I'm sure others may be able to recommend some other modules that work well in multiplayer.
And then obviously there are a lot of modules that are amazing but only work for single player. You might find some of the information in this post helpful.
And I guess one of us has to host in order to play through the campaigns together, without others entering?
SOMEONE has to host every module, period. You'll probably want to configure a static IP and set up either a DMZ (simpler) or Port Forwarding (harder but technically more secure...but unless you think you're a prime hacking target it shouldn't matter).
PS - If I've got anything above wrong, could some kind soul come and correct me!
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Gold star from me!