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STEP 1: First, list the number of hot water devices you expect to use at any one time. Then, add up their flow rates (gallons per minute). This is the desired flow rate you'll want for the demand water heater. For example, let's say you expect to simultaneously run a hot water faucet with a flow rate of 0.75 gallons (2.84 liters) per minute and a shower head with a flow rate of 2.5 gallons (9.46 liters) per minute. The flow rate through the demand water heater would need to be at least 3.25 gallons (12.3 liters) per minute. To reduce flow rates, install low-flow water fixtures.

 Average Flow Rates
 Bathtub  Shower  Kitchen Sink  Laundry Sink  Dishwasher  Jacuzzi Tub
 2.0 - 4.0 gpm  1.5 - 3.0 gpm  1.0 - 1.5 gpm  2.5 - 3.0 gpm  1.0 - 3.0 gpm  4.0 - 8.0 gpm


STEP 2: Consider the incoming water temperature (MOST IMPORTANT FOR TANKLESS WATER HEATER)
This is very important in case of tankless water heaters. When inlet water temperatures dip down into the 30s and 40s, larger BTU inputs will be needed. In certain high-volume applications, you may want to specify more than one tankless water heater unit, either installed separately or connected together to operate as a single tankless system. 
Geography: Where is your home? Consider the winter inlet water temperatures in the area to make sure there's sufficient hot water flow on the coldest days. The rule of thumb is: 
i. 40°F for the northern tier of states. 
ii. 50°F in most parts of the South.
iii. 60°F year-round in Southern California, the Southwest and Gulf states.
To determine temperature rise, subtract the incoming water temperature from the desired output temperature. Unless you know otherwise, assume that the incoming water temperature is 50ºF (10ºC). For most uses, you'll want your water heated to 120ºF (49ºC). In this example, you'd need a demand water heater that produces a temperature rise of 70ºF (39ºC) for most uses. For dishwashers without internal heaters and other such applications, you might want your water heated at 140ºF (60ºC). In that case, you'll need a temperature rise of 90ºF (50ºC).