Residual soils are generally characterised by a low coefficient of permeability and high shrinkage potential. Several soil improvement methods can be applied to overcome these problems, including mixing the residual soil with coarse-grained soils. In order to study the effects of varying coarse-grained materials on the hydraulic properties and shrinkage characteristics of residual soils, a local residual soil was mixed with different percentages of a gravelly sand and a medium sand. The hydraulic properties and shrinkage potential of the residual soil and the soil mixtures were investigated. The measurements showed that increasing the amount of coarse-grained materials increased the saturated permeability and reduced the shrinkage potential of the residual soil mixture. Increasing the amount of coarse-grained materials in the residual soil produced changes in several key parameters of soil–water characteristic curve (e.g., the slope, the air-entry value, the residual matric suction, and the residual volumetric water content), as well as the unsaturated permeabilities of the soil mixtures.