most of the fast drag boat types don't cool their v drives. If I was you I would keep yours water cooled. Unlike the rear end in your car there is no air moving over the v drive. You'll be putting miles / hours on your v drive unlike the flatbottom / hydros the only run 1/4 mile in under 10 seconds.
If you leave water in there for any length of time you could get pitted bearings and the like.
sounds like it just needs some new gaskets. What type of v drive is it?