I may actually house the tankless water heater OUTSIDE of the boat super-structure in another small locker-like housing with the propane lines routing along the inside then exiting right were the inlet on the heater would be. A lot of good info and cautionary misgivings on other boat forums that talk about tankless water heaters. Opinions vary as well as experience using these systems. Whatever system I get will super cede the ABYC & Coast Guard recommendations I hope in regards to the safety features. The systems vary from Camp/cabin systems to RV units and at least one pure marine/boat dedicated set up:(the Showermate.)
And before I forget, check out the latest pics on the photos-sharing site: http://s1216.photobucket...dd377/projecthouseboat/
I'm in the process of Topside painting and drying it in.

My mother used a propane instant hot water heater in her retirement home for over 20 before it died. Worked great, but does require some water flowing through it to work at all - crank it down too much and the thing turns off. It did let my sister shower for as long as she wanted....

I am scared of propane and only use it from the little cylinders. But propane is pretty safe if any gas leak will vent overboard, not into the hull.

The best way to get heat from the engine is to buy a hot water heater with a loop for the engine coolant. It is also a help to put in an electric circulation pump powered through a thermal switch on the hot water heater, to pump engine coolant to the hot water heater. This way you not only get hot water while the engine is running, but also until it cools off. This arrangement is common in crew boats.