First and formost, eat tapas. This may be the most fun activity I can offer you advice on. There are articles on top of articles on the best places to get tapas, there are tours, and everyone has an opinion. I will recommend a few of my favorites we have visited more than once below and give tips on finding and identifying authentic tapas bars, but for the most part, you can’t go wrong. Walking around areas of town and stopping into different tapas bars is one of the most fun experiences I’ve had in Europe so far. So don’t worry too much about which bars to go to, it’s an almost universal thing in Madrid! Tapas also start late, people eat late in Spain. The best times to go out for tapas or to eat dinner is between 8pm and midnight (yes I'm serious). Honestly, go out for tapas every night after your museums and other activities are closed.
Walk around the Retiro Park
You can rent a boat, walk around, bike, or sit at a cafe. Just get a beer at the cafe, the food is not good, but it's worth it for the view of the lake and to people watch. There is a lovely rose garden to visit and the lovely glass house.
Reserve at time at Prado (if you are into art). If you are there on a Friday, the Prado stays open late, until 8pm, so visiting around 6pm would be perfect, then after it closes, TAPAS TIME. Check out the famous 3rd of May painting by Goya.
Head to Puerto del Sol - a great area dinner, tapas, and nightlife. It’s a 13 min walk from Prado. If you have time or feel adventurous, you could also check out Plaza del Cibeles or save for another night. This is another fun area of town for people watching and fine dining.
Head to try those famous breakfast churros! Chocolateria San Gines is famous for them. You order at the counter, then sit down and they bring you your order to your table. Don’t be intimidated by the large line, it moves very quickly. They only sell a few things here and everyone is there for the same thing. Split one order of churros and hot chocolate between 2 people (it's huge and very sweet).
People watch at Plaza Mayor. This is literally steps away from your chocolate churro breakfast, and is the center of it all. The restaurants on the square are a bit overpriced (as are most restaurants in main places in all major cities) but they're worth getting a drink at so you can people watch. The streets around Plaza Mayor are filled with historic and authentic shops and bars so walk off the beaten path!
Take a walking or food tour
We had an amazing experience with this guide on this tour. He was fun, knowledgeable, and took us to an amazing area of town with interesting restaurants that we otherwise wouldn’t have known about. There was plenty of food and wine, this isn’t a tour where you sample a few cheese. You will be full!
Tour Guide: Enrique Carvallo, Phone: +34-666-932-761, email: firstname.lastname@example.org - this tour guide was amazing. He was just what we needed to find some of the off the beaten path areas of Madrid.
If you are on a budget, consider a free walking tour of the main sites to get some history: this company is always good and we have used this company in other cities.
Visit Sofia Museum where Guernica by Picasso hangs and many other famous modern art pieces. It's housed in an historic building with a. beautiful courtyard with fountains where you can take a break from the bustle of town. Open from 10am-9pm. You can book in advance but there was no line when we got there, may have been because it was the shoulder season.
Lunch at Botin for a nicer historic option. They are known for their suckling pig. Although this place is amazing and is famous for it's wine cellar (ask to go inside!), it does attract tourists. For a cheaper and less touristy spot, try the fried cod and beer at Casa Labra (Calle de Tetuan 12) for all the history without the price tag. Even if you decide to skip Botin, the small, narrow streets where it is located is a lovely place to people watch.
Visit the Palacio Real
This is Spain's royal palace and it's similar to other European palaces in that it is decadent and outrageous. Do the self guided tour, there are plaques with a small amount of info in each room or get an audioguide. After ward, hang out in the palace gardens, they are also lovely. You are now in the old city center so get lunch near by.
Here are some of our favorites:
Casa Patas: Calle de los Canizares, 10 - has live flamenco shows
La Dolores: Plaza Jesus, 4 - Your standard tapas bar
Casa Alberto: Calle de las Huertas, 18 - glorious historic tapas bar
Casa Gonzales: Calle del Leon, 12 - This is a gourmet store by day, tapas bar and restaurant by night and has an amazing atmosphere
Cerveceria El Diario: Calle de las Huertas, 69 - the most beautiful bar I've ever seen. Go in at least for a drink just to look around
Los Gatos: Calle de Jesus, 2 - very hip and low key vibe here
El Imperfecto: Plaza de Matute,2 - often live music in this square, very affordable
Cerveceria Alemana: Plaza de sta. Ana, 6 - very nice, upscale tapas bar
If you have more than 3 days:
Consider a day trip. Not that there isn't PLENTY to do in Madrid, but getting out of the city and seeing some country side can be a great experience. Toledo is a top day trip as is the 16th century palace - El Escorial. That's actually in Madrid but is pretty far from the center of time so it takes some time to get too. Also consider having a Spanish Hammam spa experience.