Re: leak in lower unit?
There is no tubes or anything that fancy. It is just a low place where water would lay if not drained out, that is the reason for the hole. Yes, all kinds of sludgy crud from the oily exhaust also drains out there. But you say you have water in the oil, so.....
The most likely place for gear oil to appear at that drain hole would be the shift rod seal. Total disassembly of the gearcase is required for replacing that seal. Buy yourself a seal kit which will give you all the seals. Since you are totally disassembling it, there would be no sense in not replacing all the seals. Same goes for the water pump, you will have that all apart and now is the time to replace anything doubtful in there.
Before you ask, to remove the shift rod bushing, just knock it out with a 5/16" steel rod. It may buggar up the hole in the bushing a bit, but you can fix it with a round (chainsaw) file.
Don't be alarmed when you get all done and still have oil coming out the hole. As mentioned, it is black, sludgy, emulsified crud out of the exhaust....normal.