2. Tankless Water Heaters Also known as on-demand water heaters, these units heat water directly without the need for a storage tank. When a hot water tap is turned on, cold water travels through a pipe into the unit, and a heating element turns on to heat the water instantly. This type of heater is more energy-efficient since it only heats water as needed, providing endless hot water without the risk of running out. However, they can be more expensive to install.