Madrid is my favourite gay destination. Some people prefer Barcelona, but for me Barcelona is too fashionable. Madrid is more "raw" and more Spanish.
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The Madrid subway is very efficient, clean, and remarkably cheap (about 1 euro per trip). Most of the times I stay in the city center and just need 2 tickets from and to the subway station at the airport. Within the city center I prefer walking, distances are usually not that big and by walking I can breath in the atmosphere of the city. And there is always something to see and to discover along the walk.