The 23-year-old popstar and the 25-year-old rapper live near each other in Los Angeles but only became close after meeting at a bash thrown by actress and singer Jennifer.
Demi told Complex magazine: ''We met at Jennifer Lopez's Halloween party....We start talking, and it turns out that we are neighbours and we didn't even know. Then I saw her at all the Jingle Ball shows. Then we got to actually hang, and we just became close.''
Demi praised Iggy as ''very, very real'', saying that she loves being friends with someone who tells it like it is.
She explained: ''She's so awesome. She's very, very, very real. What you see is what you get. I think sometimes that pushes people away, but that's what I admire about her. She's the furthest thing from fake.''
And the pair are now so close that Iggy even appears on the track 'Kingdom' - which features on Demi's upcoming album 'Confident'.
Demi explained: ''When we finally made the decision of which songs were making the album I said 'OK I want her on this one.' So I called her and was like, 'Hey will you do a song?'
''And she's like, 'Yeah sure I'll go into the studio tonight.'''