A multi-functional heat pump system is proposed to effectively utilize waste heat and heat capacity in gray water for heating or cooling of residential buildings. Heat is reclaimed from the plate heat exchangers installed at the discharge outlet of the compressor to provide sufficient hot water for residential use. However, condenser heat recovery may not necessarily bring positive effects on improving the system performance in cooling mode. This paper investigates the effect of condenser heat recovery on system performance with capillary tube and thermal expansion valve (TXV). Moreover, the effects of four kinds of heat sink combinations on the changes of system performance with thermal expansion valve (TXV) after reclaiming condenser heat are studied. The reasons that cause negative effect, degrading system performance, of condenser heat recovery are analyzed. One remedy is proposed and analyzed.