A tankless water heater is very different from a conventional water heater - the most obvious difference being size. A traditional water heater maintains a large volume of water at a constant temperature. In contrast, a tankless water heater heats water on demand, thus eliminating the need to maintain any volume of hot water. When hot water comes out of the hot-water tap, a heat exchanger in the unit causes cold water to flow, and either an electric heating element or a natural gas burner heats the water.