On demand hot water heaters are quite popular in Alaskan bush communities and cabins. In the first few years of use, they’d burn down half the homes they were installed in, but they’ve improved the design considerably since then. You will have to speak to your local code governing entity to see what they will allow. Some are not to UPC, or NEC.
In my home I use a Buderus boiler/hot water heater combo. The water heater has got to be the best I’ve ever seen and the boiler just runs and runs and runs. They’ve both been maintenance free for five years now. The heater does not run out of hot water if the dish washer is running, the washing machine and three AM showers, and it’s very efficient. I filled up my 200 gallon Jacuzzi the other day with hot water to keep the electric Jacuzzi heater off. It kept up with the demand.
http://www.buderus.net/Default.aspx?tabid=876&cid=13&ctitle=multi-purpose
