Water in the bellows: Inspect the bellows very well, looking for any checks/cracks especially when the bellhousing is lifted. If this is new to you and unknown service history, would recommend replacing driveshaft, shift, and less importantly exhaust bellows. Replace the shift shaft bushing. Replace the shift cable. Inspect the u joints closely, replace if there is excess play/not smooth/rust. Check gimbal bearing. Replace if it doesn't turn smoothly. Check alignment. Get Mercruiser shop manual.
All of that is a solid day, maybe 2 if you haven't done it before or if you run into issues.