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Regarding Madrid Hostels:

Madrid has hundreds of cheap hostels and other lodging establishments. Many are competitive in price and location. The questions is, should you stay in a hostel, hotel, or holiday rental apartment? Below, I've created a complete collection of Madrid hostels (called "hostales") and pensions for those looking for an inexpensive, safe, and clean place to sleep while in Madrid. Remember, you're not in Madrid to SLEEP, but everyone wants to "slep cheap" in Madrid!! Regarding New Years Eve in Madrid, be sure to make your reservations EARLY for Hostels in Puerta del Sol Madrid.
MadridMan's Recommendations:
I've personally stayed at and can recommend Hostal López, Hostal Martín, Hostal Madrid Cervelo, Hostal Dulcinea, Hostal Aresol, Hostal Oporto, & Hostal Chelo. These "hostales" are operated run by hard-working families who have chosen this very difficult full-time career. Please honor andn respect them for their efforts. Read feedback, recommendations, and reviews of MANY Madrid hostels in the "Hostels and Other Lodgings" forum of MadridMan's ALL SPAIN Message Board.
What is a hostel? In Spain - and even in Latin America, hostels are generally very small, family operated budget hotels, found in some of the most interesting, historical, and active parts of the city at very good prices. Don't confuse hostels in Spain with youth hostels, however. Youth-hostels are called "albergues juveniles" (or just "albergues") in Spanish while hostels are called "hostales", pensions are "pensiones".

WHERE to stay? Recommended areas of lodging in Madrid's Old City Center includes the Puerta del Sol, Gran Via, Plaza Mayor, & Huertas neighborhood. My favorite part of Madrid is the old neighborhood of Huertas. Huertas is halfway between Puerta del Sol and the El Prado Museum, easily walkable to the tourist areas, but less touristy and has a number of hostels, wonderful tapas bars, and a real feel of "Old Madrid" with its narrow, jumbled street layout. The busy Puerta del Sol, Gran Vía, & Plaza Mayor areas are "where the action is". This is the tourist center of Old Madrid with easy, on-foot access to all touristic places to visit. If you decide to stay outside of "Old Madrid", don't worry, because the city is VERY WELL connected via metro.

MOST Featured Hostels in Madrid

Madrid Hostel Horizonte
Zone: near Huertas
Hostal Internacional
Zone: Huertas / Sol
Hostales Victoria
Zone: Puerta del Sol
Hostal Cruz Sol
Zone: Plaza Mayor
Hostal Persal
Zone: Plaza Santa Ana
Hostal Abril
Zone: Chueca-Gran Vía
Gay Hostal Puerta del Sol
Zone: Puerta del Sol
Gay-Friendly
Casa Chueca

Zone: Chueca

Other Featured Hostels in Madrid

Hostal Helena II
Zone: Gran Vía
Hostal Madrid
Zone: Puerta del Sol
Hostal Castilla II
Zone: Puerta del Sol
Hostal El Pilar
Zone: Puerta del Sol
Hostal Astoria
Zone: Puerta del Sol-Huertas
Hostal MH Fuencarral
Zone: Gran Vía
Hostal Oriente
Zone: Plaza de Opera
Hostal Lemus
Zone: Gran Vía

More Family Operated Hostels Below

Pension Stella
Gran Via/Plaza Callao
America
Gran Via / Chueca
Pension Gay Madrid House
Gran Via / Chueca
Pension Lemus
Gran Via / Chueca
Concepcion Arenal
near Gran Via
Zamora
near Gran Via
Eurosuites
near Gran Via / Callao
Orly
Gran Via / calle Montera
Casa Bueno
Gran Via
Maria
Gran Via / Callao
Nersan
Gran Via / Plaza de España
Maria Luisa
Gran Via / Chueca
Nuria
Gran Via / Chueca
Palacios
near Gran Via
Pereda
Gran Via
¡ Su Pension Aqui !
Avenida
Gran Via
Continental
Gran Via
Hospedaje Dolce Vita
Gran Via / Chueca
Santillan
Gran Via
Tokio
Gran Via
Andorra
Gran Via
Lauria
Gran Via
Maria Cristina
Gran Via
Conchita
Gran Vía
Condestable
Gran Via/Plaza Callao
La Fontana
Gran Via
¡ Su Pension Aqui !
Triana
Gran Via
Alcazar Regis
Gran Via / Plaza de España
Atrium
Gran Via
Chueca Pension
Gay-Friendly
Gran Via / Chueca
Felipe V
Gran Via
Vazquez de Mella
Gran Via / Chueca
Las Murallas
Gran Via / Chueca
Gay-Friendly
Casa Chueca

Gran Via / Chueca
Galaico
Gran Via
Helena
Gran Via
Alistana
Gran Via / Chueca
Luis XV
Gran Via / Calle Montera
Hostal Gay Sonsoles
Gran Via / Chueca
Hostal Gay Odesa
Gran Via / Chueca
Hispano Argentino
Gran Via
Hostal Gay La Zona
Gran Via / Chueca
Besaya
Gran Via / Plaza de España
San Jose
Gran Via /Plaza Callao
El Catalan
Gran Via / Chueca
Lamalonga
Gran Via/Plaza Callao
Union
Gran Via / Chueca
Arti
Gran Via / Plaza de España
only Jul, Aug, Sept
Pension Adeco
Gran Via / Chueca
Gran Via 44
Gran Via / Plaza Callao
Jerez
Gran Via / Calle Montera
Hispano
Gran Via / Chueca
Casillas
Gran Via / Chueca
Zamoran
Gran Via / Chueca
Tudescos
Gran Via / Plaza Callao
Hostales Breogan & Kryse
Gran Via / Chueca
Pension Barja
Gran Via / Callao
¡ Su Pension Aqui !
Josefina
Gran Via /Plaza Callao
Aliste
Gran Via
Splendid
Gran Via
Romero
near Gran Via
¡ Su Pension Aqui ! Abril
Gran Via / Chueca
Pension Berti
Gran Via / Chueca
¡ Su Hostal Aquí !
Bianco II
Gran Via
Chelo
Gran Via / Chueca
La Plata
Gran Via
Santo Domingo
Gran Via / Plaza Callao
 
Salome
Noviciado
Abami
Noviciado
Gallardo
Tribunal
Babel Guesthouse
Noviciado / Gran Vía
Miguel Angel
Tribunal (north)
Visa
Chueca
Centro
Tribunal (north)
Los Perales
Noviciado
Los Angeles
Cuatro Caminos (north)
Asuncion
Alonso Martinez (north)
del Pez Azul
Noviciado
Benamar
North of Chueca
ColorsHost
Chueca
Moncloa
Moncloa
Pizarro
Noviciado / Gran Vía
Dominguez
Chueca/Tribunal
Enebral
Plaza Dos de Mayo
Santa Barbara
Plaza Santa Barbara / Chueca
Abel Victoriano
Noviciado / Calle San Bernardo
Posada del Pez
Noviciado
Los Andes
Arguelles
Pension Antonio
Noviciado / Gran Vía
¡ Su Hostal Aqui ! ¡ Su Pension Aqui !
 
Horizonte
Calle de Atocha
Nieto
Calle de Atocha/Huertas
San Blas
Calle de Atocha/Atocha Train Station
La Nava
Barrio de Salamanca
Fabiola
Plaza Tirso de Molina
Dos Naciones
near Lavapies
Numancia
Lavapies
Florida
near Lavapies
Rofer
Puerta de Toledo
Edreira
Calle de Atocha
Arco Iris
Retiro Park
Huespedes Toledo
Plaza Tirso de Molina
Barrera
near Atocha
Don Diego
Barrio de Salamanca
Salamanca
Barrio de Salamanca
La Vera
Plaza Tirso de Molina
Prim
Plaza de Cibeles
Pension Mollo
near Atocha
Analina
Plaza Tirso de Molina
Apolo
La Latina / Tirso de Molina
Santa Isabel
near Calle de Atocha
Martin
Calle de Atocha
Cervelo
Calle de Atocha
¡ Su Hostal Aqui !
 
Los Coronales
near Barajas Airport, IFEMA
M. Ronda
Carabanchel (soutwest)
Villa de Madrid
Juan Carlos I Expo Center
Pension Paquita
North, outside M-30
Los 5 Pinos
near Barajas Airport
Granado
Carabanchel (southwest)
Hostal Aeropuerto
near Barajas Airport
¡ Su Hostal Aqui !
 
Internacional
Huertas / Sol
San Isidro
Huertas / Canalejas
Plaza D'Ort
Huertas / SOL
Marlasca
Huertas / SOL
Pacios
near Plaza Santa Ana, Huertas
Sardinero
Huertas
Armesto
Huertas / Paseo del Prado
Alfaro
Huertas
Villar
Huertas
Santa Isabel
near Huertas/Calle de Atocha
Bruña
Huertas / Pº del Prado
Lopez
Huertas
Bermejo
near Huertas
Persal
Huertas
Gonzalo
Huertas
Lisboa
Huertas
Corbero
Huertas
Fernandez
Huertas
Rivera
Huertas / Lavapies
Dulcinea
Huertas
Retiro
Huertas / Paseo del Prado
Castilla I and II
1:Huertas 2:SOL
Cervantes
Huertas
Jaen
Huertas
 
Madrid
near Puerta del Sol
La Jerezana
SOL / Benavente
Oliver
Puerta del Sol
Guerra
Puerta del Sol
Esmeralda
Puerta del Sol
Ana Belen
Puerta del Sol
Centro Sol
Puerta del Sol
El Pasaje
near Puerta del Sol
Alaska
Puerta del Sol
Alhambra
Puerta del Sol
Principado
Canalejas / Huertas
Faustino
Puerta del Sol / Huertas
Gay Hostal Puerta del Sol
Puerta del Sol
Gislay
SOL / Plaza Mayor
Panizo
SOL / Benavente
Olga
Canalejas (near SOL)
la Bañezana
SOL / Plaza Mayor
Aresol
Puerta del Sol
Los Arcos
SOL / Plaza Mayor
Fuentesol
Puerta del Sol
Almanzor
Puerta del Sol
Pretoria
Puerta del Sol
El Pilar
Puerta del Sol
Astoria
Canalejas (near SOL)
Aguilar
Canalejas (near SOL)
Oporto
Canalejas (near SOL)
Lido
near SOL / Huertas
Adria Santa Ana
SOL / Huertas
Bahia
SOL / Plaza Mayor
Veracruz
Puerta del Sol
Biarritz
Puerta del Sol
Playa
Puerta del Sol
Adriano
SOL / Huertas
Reconquista
Canalejas (SOL)
Nuestra Señora
de la Paloma

SOL / Plaza Mayor
Hostales Victoria
Puerta del Sol
Mirentxu
Canalejas (SOL)
¡ Su Pension Aquí ! ¡ Su Hostal Aquí ! ¡ Su Hostal Aquí !
 
Ivor and Mayrit
Opera
Oriente
Opera
La Perla Asturiana
Plaza Mayor
Mairu
Opera
Gran Duque
Opera
Las Fuentes
Opera
Rober
Opera
Comercial
Plaza Mayor
Esparteros
Plaza Mayor and SOL
Conchita II
Opera
Patria Madrid
Plaza Mayor and Sol
TIJCAL I and II
1: Plaza Mayor 2: SOL
Luz
Plaza Mayor and Opera
Sotileza
Opera and SOL
Cruz sol
Plaza Mayor
Santa Cruz
Plaza Mayor