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Regarding this, how deep should an outboard be in the water?
A boat rigger's rule of thumb is that the motor can be raised one inch for each eight to 10 inches of distance between the transom and prop. As the prop moves further aft, it's also likely to be in cleaner, “harder” water, and be more efficient.
Keeping this in consideration, where should water come out on an outboard motor?
Water is drawn into the water pump through the intake opening of the lower unit, where it passes through a cavity that ends up entering the pump itself. At that point, the impeller pressures the water into the long inlet tube leading to the bottom side of the powerhead.
Run the engine for 10 minutes, or according to the manual's instructions. If you're flushing the motor, most manufacturers recommend running it for 5 to 10 minutes. If you're running the engine for another purpose, such as to test its function, run it for as long as your maintenance task requires.