I have a corded dremel and when drilling metal, i always use about 3/4 of the RPMs. I also use water to cool the bit while drilling. Drill bits WILL lose their sharpness... you may be running a blunt bit.

You should always seal the engine compartment wood. I always use epoxy, but i know you can use wood sealer or I've heard CA will work too. I am sure somebody here has some good advice for that.