A new methodology for the synthesis of hydrophilic iron oxide nanoparticles has been developed. This new method is based on the direct chemical modification of the nanoparticles' surfactant molecules. Using this methodology both USPIO (ultrasmall super paramagnetic iron oxide) (hydrodynamic size smaller than 50 nm) and SPIO (super paramagnetic iron oxide) (hydrodynamic size bigger than 50 nm) were obtained. In addition, we also show that it is possible to further functionalize the hydrophilic nanoparticles via covalent chemistry in water. The magnetic properties of these nanoparticles were also studied, showing their potential as MRI contrast agents.