Please see the picture in the begining post. There are two water outlet, one is right before the heater(at the cold water line) and the another is right after the heater (at the hot water line). The water always clean before the heater. The water after the heater will become rust-color if it is not used for a while (may be 12 hours, the more time the more rust-color stuff) even the heater is shutted off ( temperature of the water comes out from heater is not heated, in order to test if the heating will create some changes).
The tankless water heater contains some water that can settle overnight or during the day when you are not at home. It will collect at the outlet of the unit.