A water heater includes a storage tank for storing water, a combustion chamber, a burner positioned in the combustion chamber, and a heat exchanger positioned in the storage tank. The burner produces products of combustion. The heat exchanger receives the products of combustion from the combustion chamber and transfers heat from the products of combustion to the water stored in the storage tank. The heat exchanger includes an upper portion and a lower portion. The upper portion is positioned above the combustion chamber and the lower portion is positioned below the combustion chamber.