Abstract: An apparatus and method are disclosed for supplying domestic potable hot water and also heating an air space using a single combination unit having a common water tank and heat source for heating water therein. The water tank has an outlet for the supply of heated potable water and an inlet for the replenishment of same with cold water. A portion of the hot water is recirculated through a heat exchanger mounted in an air handler or housing. The air handler has a blower for passing the room air through the heat exchanger to heat the air space. The temperature drop of the water circulating through the heat exchanger is limited to 6.degree. F. by using a low pressure drop heat exchanger and a relatively high flow rate circulating pump, so the supply of potable hot water is always sufficient. Air heating is suspended if the heated air drops below 115.degree. F.