As for ducting a new tank heater. I'd love to find a high efficiency one, if they are truly cost effective, especially if I can vent it out a side wall. I need to check cost as well, but I think a 50 or 60 gallon tank is what I'd like to try to go with. Maybe it is overkill, but if cost isn't a HUGE factor, why not. Especially if I try to install some supplemental radiant heat at a later date.
The good news, if you can call it that, is that my current chimney isn't lined. I've had several people out to quote me the job, and they all tell me to just do it myself no harder than it would be. So, it is on my project list for the spring. I say it is good news, because if the new heater would require a different flue than what I have now it shouldn't be any more work to install a larger diameter liner. Of course it would be nice, if it could be tied directly into my furnace flue, so I would only have to run one flue pipe up. That way, I'd definately have room for a gas fireplace later.
And from what I understand, as long as the system is allowed to flow through and not sit and stagnate, it would be fine to use on the same heater as the drinking water.