Re: Garage woodshop conversion - Is the water heater a fire risk?
While combustion of dust or finish fumes is possible, it is unlikely. Enclose the water heater and either install an outside air source, or, install air grills in the door of it's enclosure. When I had my shop in my garage, I also had the HVAC along side the water heater. I enclosed both in a closet and put bypass closet doors on them, including the air grills. Dust getting into the equipment was minimal.
Additionally, do yourself a favor and set up both a dust collection system, including a central collector with ports at each tool, a down draft sanding table, and an overhead air filter. The use of these things will further mitigate dust levels in the space, which will help keep the dirt out of the house as well.
I suffer from CDO ... Its like OCD, but in alphabetical order, LIKE IT SHOULD BE!!!