We get this question a lot at Wattbot:  should I choose (or upgrade to) a tankless hot water heater?  The short answer:  don’t make the choice based on efficiency or lifetime costs, as both types are a wash over time.  Instead, choose purely on the basis of the installation.  If you don’t have the space for a tank, or you want an outdoor installation, then choose a tankless.  Otherwise, choose a tank model.

The reason we say that you should only choose a tankless system if you don’t have enough space to install a tank is pretty much for the same reasons that Consumer Reports noted in an October 2008 article:

• Despite heated claims over efficiency, it turns out that modern tank units are only slightly less efficient than tankless units, in real life settings.
• That slight efficiency advantage is rarely enough to make up for the additional up-front costs of a tankless unit over the life of the system.  In the end, a tankless system will at best break even, if a realistic cost analysis is performed.

So our advice is to ignore the partisan efficiency and cost arguments, since they are, for all practical purposes, a wash, and instead just pick your system on the basis of available space.  There’s a reason that tankless systems are popular in Japan — Japanese houses rarely have space for a hot water tank!