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I too have made a tool like the one Lloyd referred to. It is just a round block of steel with holes drilled into it that match the KE-4/KE-7 and others in this family. I have made it into a universal tool, so I also have holes in it that match the KH-7-MK-25 water pump cover and the gearcase cover nut. Very handy. What Dave B was talking about was using a spacer between the tool and the prop nut that keeps the tool from slipping off and out of the holes. The more firm you can keep the tool, the easier it will be to remove the nut. Heat is also helpful if it is really stuck. You will not have to remove the water pump housing unless you need to replace the oil seal in it or if the face of it is badly worn. A lot of wear on the pump side of the cover nut will also reduce the efficiency of the pump. It depends upon how much you plan to use the motor. If it is bad, you can replace it, or if the grooves are minor, you can fill them in with a good epoxy like JB Weld and sand smooth. (Not a permanent fix, but if you put 10 hours a year on your motor, it will last quite a while.) The small screws and the center bolt on the M-60-558 tool pictured above is for removing the water pump assembly by threading the two screws into the pump housing and pulling it out with the center bolt. I have some long bolts that I welded up that I use along with my balancer puller. (A guide plate that has holes for the prop shaft and the two bolts help keep it square when pulling)
Steve