In this study, a multifunctional air and water source heat pump system was developed with a parallel refrigerant piping arrangement, which possessed six operational functions: space cooling (SC), space heating (SH), water heating (WH), water cooling (WC) and two composite operational modes. The two composite operational modes were the SC/WH mode and the SH/WH mode. The performance of the multifuctional heat pump system under different ambient conditions was investigated based on the testing standards of CNS 14464 and CNS 15466. In this study, the effect of the direct water heating (DWH) and circulating water heating (CWH) methods on the performance was investigated. It was found that the water heating performance of the system by the DWH method is better than that of the system by the CWH method. The water heating capacity and COPw,h of the DWH method can be improvement by 2.6% to 22.1% and 2.9% to 50.8%, respectively. Moreover, this study developed a refrigerant pressure balance method to achieve an effective steady state of the refrigerant pressure after operational mode switching. By the refrigerant pressure balance method, the required time to attain the steady state could be greatly reduced—by 50%. However, the deviation of the refrigerant mass flow rate between the refrigerant pressure balance method and the refrigerant pump down method after operational mode switching ranged from 0.15% to 7.6%.