I love the idea and plan on doing something similar myself with my upstairs bath once I get a gas boiler setup in the basement. Right now I'm using a Steibel Eltron on demand hot water heater. The price didn't break the bank, but paying for it a few gallons at time would take a very long time to pay for itself. I'd suggest the replumbing that Ryland suggests first. PEX is pretty cheap and its easy to run.
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