I have a Bradford-White 2 gallon electric water heater under the kitchen sink. We get hot water almost instantly - 2 or 3 seconds and it's hot.
It works superbly for the many small hot water draws of a kitchen faucet, but I don't think it would work so well in a shower. The temperature fluctuates from hot to plenty warm back to hot as the cold water in the line mixes with the hot water in the tank.
I vote for the 1/2" PEX that Ryland recommended.
Plumbers like to run a main hot water line about 3/4" diameter, then branch off that. Hot water supply is more efficient if you run each line straight from the water heater, and size each line for the flow of that particular application.
I once ran a 3/8" copper line to a kitchen faucet. That worked very well, with only one pint of cold water before the hot water arrived.
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