A multi-functional heat pump system has been proposed to effectively utilize waste heat and heat capacity in gray water for heating and cooling of residential buildings. Condenser heat recovery is integrated into the system. This system was tested in two environmental chambers that mimic the outdoor and indoor environments, respectively. In this paper, the investigation of the optimized system is focused on the system optimization and performance in cooling mode. The drawbacks of the initial prototype are analyzed and fixed. The system performance in the initial and optimized prototypes are compared and analyzed. At outdoor temperature 35 degrees C, compared to initial type, the COP of optimized prototype increases up to 20.07% for space cooling mode and up to 21.51% for space cooling with hot water supply mode. This system is tested and analyzed at space cooling mode, space cooling with hot water supply mode and hot water supply only mode. (C) 2017 Elsevier B.V. All rights reserved.