If I did use the Kenwood would I be giving up sound or picture quality.
Definitely not picture quality. (unless you were talking about an expensive receiver that did video processing for standard def sources, otherwise, no).
Sound quality, the first thing I'd be concerned about, if building a new system, is if the Kenwood has a beefy enough amp. Now, I bet it would for many, many, many people, but if you want to really crank it, with tough speakers to boot, then that's something to consider.
There are other features as well too. This is impossible to answer. Either you want to try them out, spend money, or do your best with money in the pocket. I will NOT tell you what to do here. (and you don't want me to either, otherwise you might become poor very fast!).
I know the big thing seem to be to use HDMI cables although I really don`t know exactly the difference is.
Sure, use it when available. It's not always necessary by any means, however.