Multiferroic materials have driven significant research interest due to their promising technological potential. Developing new room-temperature multiferroics and understanding their fundamental properties are important to reveal unanticipated physical phenomena and potential applications. Here, a new room temperature multiferroic nanocomposite comprised of an ordered ferrimagnetic spinel α-LiFe5O8 (LFO) and a ferroelectric perovskite BiFeO3 (BFO) is presented. We observed that lithium (Li)-doping in BFO favors the formation of LFO spinel as a secondary phase during the synthesis of LixBi1-xFeO3 nanoceramics. Multimodal functional and chemical imaging methods are used to map the relationship between doping-induced phase separation and local ferroic properties in both the BFO-LFO composite ceramics and self-assembled nanocomposite thin films. The energetics of phase separation in Li doped BFO and the formation of BFO-LFO composites is supported by first principles calculations. These findings shed light on Li’s role in the formation of a functionally important room temperature multiferroic and open a new approach in the synthesis of light element doped nanocomposites.