Synthesis of multifunctional magnetic nanoparticles (MFMNPs) is one of the most active research areas in advanced materials. MFMNPs that have magnetic properties and other functionalities have been demonstrated to show great promise as multimodality imaging probes. Their multifunctional surfaces also allow rational conjugations of biological and drug molecules, making it possible to achieve target-specific diagnostics and therapeutics. This review first outlines the synthesis of MNPs of metal oxides and alloys and then focuses on recent developments in the fabrication of MFMNPs of core/shell, dumbbell, and composite hybrid type. It also summarizes the general strategies applied for NP surface functionalization. The review further highlights some exciting examples of these MFMNPs for multimodality imaging and for target-specific drug/gene delivery applications.