Nanoscale materials offer unprecedented opportunities to investigate and interact with biological systems. Magnetic nanomaterials are especially promising due to the potential for locating materials inside the body using an external magnetic field. For example, magnetically targeting chemotherapy drugs could decrease the systemic effects that make cancer treatment so debilitating. Magnetic targeting requires materials with large magnetic moments, but also the materials must biocompatible, and stable in air and aqueous environments. Size and surface characteristics (e.g. charge, chemical functionality) must be controlled to regulate how the nanomaterials circulate within the body and interact with different types of cells. After a general overview of the challenges and opportunities for magnetic nanomaterials in biomedical applications, I will describe our work developing multifunctional magnetic nanoparticle fluids. The nanoparticles deliver multiple hydrophobic anti-cancer drugs to specific locations while enhancing magnetic resonance imaging. In our formulation, drugs partition in the hydrophobic portion of a double-layer surfactant that improves drug loading and release. The outer surfactant layer increases circulation time in the body. I will then describe our use of inert-gas condensation into liquids to produce nanoparticles with higher magnetic moments that will improve the magnetic targeting capability, and our efforts to understand the mechanisms by which surfactants change magnetic properties.