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. It is observed that lithium (Li)‐doping in BFO favors the formation of LFO spinel as a secondary phase during the synthesis of Li_xBi_1−xFeO₃ ceramics. 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 are 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 for future energy, sensing, and memory applications.