questionsis it necessary to have a small gas water heater…

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Only if the tankless heater is electric and you're using it for an appliance or shower/bath.

The electric tankless systems can't keep up with demand. Tankless gas water heaters do not have this requirement I believe.

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@xavoc: I would second that response. Gas heaters are much more capable of heating water quickly. The electric ones require a lot of juice and heavy wiring to get the job done. If one already has gas service, it makes sense to use a gas tankless water heater. (Gas is also cheaper than electricity.) If the tankless has enough output, one should not need a regular water heater.

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If you live at a high elevation make sure yours is rated for that elevation. When my water heater broke I got a gas pilotless tankless and it completely never worked. If you turned it to just hot it would run scalding hot water for about 3 minutes before it turned itself off. If you tried to mix the hot with cold it immediately turned itself off. Then you had to do downstairs and outside to the water heater room and hit the reset switch. Repeat. I was dumb and got one without a very useful warranty and had a friend install it. After weeks of struggling with it I found out online that the electronics had a known defect at higher elevations. Reviewers said the company was very reluctant to admit to this defect, even though it just required them to mail out some small and easily replaceable part. Most people, including me, never got them to help. After a year of cold showers and cold dishwashing it was with great joy that I sent it to the dump and got a traditional one.