AV1 is definitely a showstopper a lot of the time indeed. H265 I would expect to see more on 2k or 4k content (though native support is really high anyway). My experience so far has been seeing transcoding done only becuase the resolution is unsupported when I try watching 4k videos on an older 1080p only chromecast.
Absolutely, whatever works for you. I think its awesome to use the cheapest hardware possible to do these things. Being able to use a media server without transcoding capabilities? Brilliant. I actually thought you’d probably be able to get away with no transcoding at all since 1080p has native support on most devices and so does h264. In the rare cases, you could transcode beforehand (like with a script whenever a file is added) so you’d have an appropriate format on hand when needed.