Biocompatible nanoparticles, with magnetic cores and optically active shells, acting as multifunctional materials with a core size of 6 nm encapsulated in silver shells of varying thickness were synthesized through a novel single phase microemulsion method. Incorporation of silver shells onto the magnetite core enhances the intensity of the highest luminescence peak observed for magnetite by a significant luminescence enhancement factor. A blue photoluminescence peak observed in the visible region of spectrum brightens further with the increase in the thickness of silver shell. The magnetic properties of these core-shell nanomaterials show superparamagnetic behavior at room temperature, which is a mandatory criterion for MRI contrast enhancement agents. The hyperthermic response of synthesized magnetite nanoparticles elevates its temperature to 43 °C in a sharp span of time, which is above the desired temperature for the therapeutic application of these multifunctional nanomaterials. These excellent optical and magnetic properties, of the material having a size range suitable for cellular uptake, make it a potential candidate for both diagnostic and therapeutic uses in biomedical applications.