No, water isn't a problem if your not a moron. Basically, after installing a CAI, replace the fender well liner. As long as you don't actually submerge the filter element under water, you're pretty safe. I've had my AEM CAI for a couple years now without any problems or one of those bypass valves. Now, as to which is better, the CAI will give more power. It will be complemented by other bolt-ons like exhaust, headers, and whatnot. But, the CAI alone won't do much. If you plan to actually make your car fast, get the CAI and work from there. Most CAI kits come with a K&N filter anyway. If you're just looking for a tiny boost to power and fuel efficiency, just get the K&N filter element.