Water heater? Are you going to ferment in the bathtub? Just kidding
Any tank that is in good condition will work fine. In fact, you could get a pretty big brew going. Hopefully your taking the tank out of the water heater shell? It would look strange if you showed your brewery/water heater to your friends. I think your on the right track. Please post the results with pics, old water heaters could be a great source for large capacity brews. In fact, do a picture blog showing each step of the way. I'm sure everyone, including me, would love to see your work.
My club, the Maltose Falcons(.com), used several old 30 gallon swimming pool filter tanks and they work fine. I think there are pics on the website.
Good Luck,