What the best water heater has?Energy efficiency. Natural gas is more affordable in most areas of the country than electricity, and because it's more efficient, gas water heaters cost less to run. Among electric water heaters, those that use heat pump capacity offer considerable energy savings -- certainly enough to offset their higher cost in just a few years. Tankless water heaters are another energy efficient choice, but they have some minuses that might not make them a perfect fit for every situation. Regardless of the type or fuel source, all new water heaters are subject to NACEA energy efficiency regulations that went into effect in April 2015.

?Ample hot water capacity. The right-sized water heater will provide your family with all the hot water it needs, while costing less in terms of upfront price and energy consumption. As an example, a 40 gallon hot water heater will supply enough to meet the needs of a typical family of four. When sizing a tankless hot water heater, consider both your family's needs and your climate.
?Sufficient first hour rating (FHR). The first hour rating is based on the hot water stored in the tank plus the amount of incoming cold water that can be heated in an hour. The higher the rating, the more hot water you can get during peak usage times in your home. Online calculators can help you determine what FHR you need.
?Low NOx. Natural gas fuels produce nitrogen oxide pollutants. Models with a low NOx rating emit less into the surrounding air. Some areas of California require ultra-low NOx water heaters, so California residents should check the regulations before selecting a model
?High recovery rate. The recovery rate refers to how quickly the water heater can produce more hot water after the initial supply has diminished. A low recovery rate means you may be waiting awhile, or taking a cold shower once you use the initial supply. 
?High flow rate. This figure refers to the number of gallons of hot water per minute (GPM) the water heater can produce. Clearly, higher flow rates are useful in many situations. 
?A good warranty. Choose a water heater with at least a six-year warranty. Some warranties cover only the tank and parts, and most brands that cover labor limit it to just one year. The best water heaters come with warranties of 10 to 12 or more years.
Know before you go
How much space do you have? Water heaters vary in height and diameter. If you're moving up in tank size, you'll need to make sure you have enough space for the larger capacity. Also, some water heaters require a certain amount of surrounding air (usually heat-pump or hybrid types), so you'll need to plan for appropriate cubic square footage requirements. Water heaters that comply with the 2015 NACEA regulations may have more insulation than older models, and hence might be taller or wider than a heater they are replacing. Check the specs before buying if clearances are tight.
Do you have existing natural-gas service to your home? If you're purchasing a gas water heater, you'll need natural gas service to your home. If you don't already have it, consider the additional installation costs. Gas heaters that run on liquid propane are also available
Consider your electrical needs. Residential water heaters typically require electricity to run. In the case of a gas heater, that's standard 115 volt service for the ignition system -- and some just plug in to a convenient outlet. Electric heaters, including tankless electric heaters, require 220 volt service, and a dedicated line that's rated sufficiently to handle their current draw.
Consider your venting. Gas water heaters have to be vented to the outside. This can be handled in many ways, as outlined in this About.com article. Be aware that even when replacing one gas water heater with another, local building codes might have made changes since your last installation. The best advice is to consult a licensed plumber to be sure that venting is done safely and adequately. 
What about solar water heaters? Solar water heaters are also available. Most use solar energy as a supplement to other fuel sources as sunlight can be unpredictable, but Energy.gov notes that they can still save owners enough money to pay for themselves over time. Newer technologies are making strides in both harvesting more sunlight and storing that energy for later use, ensuring a more constant fuel supply. This article on solar heaters discusses a few different technologies and collection systems currently used for solar water heaters.