Rapid urbanization and climate change have created an unprecedented need for urban water utilities to improve water sustainability by diversifying water resources. Towards this end, wastewater plays a pivotal role in water sustainability by closing the urban water cycle and serving as another water source. Conventionally, wastewater is collected and then disposed after some preliminary treatments. Recent innovations in water treatment technologies have paved the way for wastewater to be recycled and used for several purposes, including industrial cooling and landscape irrigation. Wastewater recycling requires an upfront capacity investment. This investment decision is influenced by the availability of other water resources (e.g., freshwater and desalinated seawater) and other idiosyncratic features of urban water systems, including different demand streams and uncertainties. This paper’s main objective is to study the water utility’s wastewater recycling capacity investment decision as a part of the integrated urban water management system while considering the important idiosyncratic features of these systems.