I used a 4 gallon point of use water heater for our kitchen sink in our last house. It worked well and recovered fairly quickly. Only complaint was running out of hot water at times, but in the shop you'd probably be good. Don't remember the brand(it was given to me) but it was 110v.
The only advantages to attached, in my opinion, is distance (carrying in groceries and such), and the weather doesn't affect you. Detached helps with noise and smell like has been said. One thing about detached, is if you keep it close to the house, you can build a nice breezeway and patio area...
I understand this. My detached garage is connected to our house by a breezeway and good size patio area. We turn on some tunes, have a beer, she sits on the patio with the dogs and I work on things in the shop. It's definitely relaxing to us.