On demand water heater using a propane tank
I usually encourage DIY projects, but when it comes to gas applications, I have to strongly caution you to consider using a licensed gas installer to connect an on demand water heater. Nothing in a home is more dangerous than gas and it MUST be installed correctly and pressure tested. Venting the exhaust is extremely important as well, and a mistake can be fatal. 

An on demand water heater is a great idea as long as it is sized correctly. I don't thin you will be happy with a 20 or 40 pound tank however.  Your local propane dealers will usually supply you a larger tank at no charge as long as you buy the gas from them. The other advantage is that they will come and swap out spent tanks or refill them on site so you don't have to be lugging a tank back and forth to a refill station, and re-priming and firing the system every time you change tanks.

Bottom line is that if you are not experienced with gas installs, don't take a chance with the health and safety of your family. You are not hooking up an outdoor BBQ!!