Plotke Plumbing Inc.,

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Tankless water heaters, also known as demand-type or instantaneous water heaters, provide hot water only as it is needed. They don't produce the standby energy losses associated with storage water heaters, which can save money. Here you'll find basic information about how they work, whether a tankless water heater might be right for your home, and what criteria to use when selecting the right model.
How They Work
Tankless water heaters heat water instantaneously without the use of a storage tank. When a hot water faucet is turned on, cold-water flows through a heat exchanger in the unit, and either a natural gas burner or an electric element heats the water. As a result, tankless water heaters deliver a constant supply of hot water. You don't need to wait for a storage tank to fill up with enough hot water. However, a tankless water heater's output limits the flow rate.Typically, tankless water heaters provide hot water at a rate of 2–5 gallons (7.6–15.2 liters) per minute. Gas-fired tankless water heaters produce higher flow rates than electric ones. Sometimes, however, even the largest, gas-fired model cannot supply enough hot water for simultaneous, multiple uses in large households. 

  Advantages and Disadvantages
   For homes that use 41 gallons or less of hot water daily, demand water heaters can be 24%–34% more energy efficient than conventional storage tank water heaters. They can be 8%–14% more energy efficient for homes that use a lot of hot water -- around 86 gallons per day. In some cases, you may be able to achieve even greater energy savings if you install a demand water heater at each hot water outlet. The initial cost of a tankless water heater is greater than that of a conventional storage water heater, but tankless water heaters will typically last longer and have lower operating and energy costs, which could offset their higher purchase price. Most tankless water heaters have a life expectancy of more than 20 years. They also have easily replaceable parts that may extend their life by many more years. In contrast, storage water heaters last 10–15 years.