Well, if your passenger cars have been converted to LEDs, it's likely they each draw far less than 5 Watts of an incandescent caboose. For example, the Hennings LED passenger car module might be set to as little as 10 mA. So using the ACS712 eBay current sensor module, that would generate a voltage output of only 0.1 V/A x 0.01 A = 10 milliVolts when a passenger car is running by that block sensor. 10mV is arguably difficult to easily detect. I understand a block can be longer than 1 car length so you'd be detecting multiple cars and hence the current to be measured would be higher, but I think you get my point.
Anyway, the emitting LED and detecting sensor on the modulated eBay module are of the 5mm ilk. So, yes, you could drill 5mm holes in your track bed or something like that.
Note that the "trick" to this modulated IR infrared occupancy detection is the integrated IR detector chip tuned to 40 kHz or whatever.
These are 3-terminal chips with the photodetector and all the electronics to detect just a pulsed/modulated IR reflection. So if you are configuring a system/layout you only need one generator of 38/40 kHz driving multiple LEDs all pulsing at a common frequency...and one of these 15 cent IR receiver modules detecting the reflections when a block is occupied. Note that the current detection method might generate a somewhat difficult to detect millivolt range output whereas this IR Receiver chip swings a full 5V or so between detect and no-detect!
