There is a fabulous book on this story that I'm 100% blanking on at this moment. It covers Flagler's endevours to bring the rail system to Florida and then to the keys. From what I recall -

He began going to Florida with his wife who was sick. At the time it was felt the climate would help her. Getting to Florida was an inefficient proposition due to the non standard rail systems from state to state. Flagler sought to begin consolidating these to provide easy passage from New York to Florida. He saw a business opportunity to get people from the city in a blizzard to sunny Florida faster and likely cheaper than ever before.

As he went he began laying down expansive, literally world renowned, hotels to create incentive for the wealthy to come and stay. With each new hotel he paused briefly before continuing further south. Miami was actually a sparsely populated ranch I believe primarily owned by a single woman who struck a deal with Flagler to extend the tracks to her. This sparked the growth of the city as we know it. Other notable cities would be Palm Beach and St. Augustine. I've personally seen the new development that became of his plot in Ormond Beach, and Rockefeller's home that he built there across the street.

During this time a couple other things were ongoing. The first was a competing rail line making its way down the western coast of the state. IIRC the plan here was to stop in Tampa and own a valuable port/rail combo. This sparked some competition to become the true Florida full service rail line. The second was the creation of the Panama Canal which promised to bring a ton of ships and cargo into the Gulf meaning a western facing port with quick access to the eastern markets seemed like a very lucrative investment.

So, a couple items really ended up driving the railway across the sea. Flagler, tourism capitalist that he was, wanted to create a line that could haul that freezing New Yorker from the snow on Friday morning to tropical paradise on Saturday evening I believe (it was definitely an overnight journey). He also was convinced that with rail access Key West would be the most prime location for pacific origin vessels to drop their freight after coming through the canal. Plus the close proximity to Havana somewhat strengthened both the tourist and trade argument for Key West.

Finally, the book at least implies a dream to take the rail literally to the end of land. It is a pretty amazing story of hardship, engineering innovation and determination, and the power of nature to destroy our infrastructure. The man saw it done in his lifetime. And yes, much of the track was utilized for the highway. I've still never driven it but do plan to eventually (I'm a Californian but my GF is from central FL, her parents got me Florida history books as a joke one Christmas).

Edit: source - Last Train to Paradise by Les Standiford