The argument for on demand heaters is, IIRC, that no energy is wasted keeping 40 gallons of water hot during the 23 hours and 45 minutes per day that it is not needed. You could install the on demand device, and a plumb a holding tank into the cold water supply line before the heater. It would be a constantly renewed back up supply in case of loss of water service. You could pressurize the holding tank with an air compressor and preserve water pressure, too. And probably run the on demand heater on propane, to avoid NG installation expense.
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The water coming into our house is so cold t that a pre warming tank is needed for an on demand tank.