Just wanted to update this thread with my suggestions in case anyone searches back on it. We had a wonderful time in all the cities we visited!
Barcelona - We didn't like Barcelona as much as we thought we would. We found two days to be sufficient. The Gaudi stuff was very cool, especially Casa Mila which we toured. We also enjoyed the Martime Museuma at the bottom of Las Ramblas.
Madrid - We really liked Madrid. Our hostal (Hostal Cruz Sol) was just between Plaza Mayor and Puerta del Sol, so it was incredibly convenient. The room was quite small and a bit run-down, but the price was great (50 euros).
http://www.hostels.com/en/availability.php/HostelNumber.1274The best part of our stay in Madrid was definitely the tapas tour we did. Our guide was an expat from San Diego and was incredibly helpful and informative!
http://www.adventurousappetites.com/One thing we didn't enjoy was the Tauro Tour at the bullfighting arena (Plaza de Toros). The small bullfighting museum inside was the only worthwhile part.
Toledo - The hotel we stayed at was great, especially considering the low price (56 euros). Hotel Santa Isabel is a block away from the cathedral. We requested room 214, as suggested in trip advisor reviews and were very happy with it.
The Zoco Tren (tourist train) was an excellent way to see the from the other side of the river. Gorgeous views of the gorge! It picks up on the hour from Plaza Zocodover, but you have to buy tickets first from a shop on Calle Sillería. It's marked as a TI on the map, but looks like a souvenir shop, so it's easy to miss. We found the staff to be incredibly unhelpful. Rick Steves' describes them as incompetent in his guidebook. Luckily that was a rare occurrence during our trip through Spain & Portugal, most often people were very friendly and helpful.
Lisbon - We loved the hotel we stayed at. Great neighborhood. Two metro stops from the main area and next to Campo Pequeno (huge bullring with a shopping mall underneath, including a supermarket).
http://www.hotelalif.pt/We did a Sintra-Cascais daytrip with Inside Lisbon and it was so enjoyable!! We had a fantastic guide name Edgar. The places we visited were all very interesting and the pace was perfect. They even dropped everyone off at their hotels upon returning to Lisbon.
http://insidelisbon.com/EN/en_passeios_sintra.htm We also did a walking tour with the same company, which was really good as well. Our guide wasn't great (very informative, but dry), but the places we visited were so interesting!
http://insidelisbon.com/EN/en_passeios_lisbon_walk.htmI'd highly recommend hearing Fado sung at Canto do Camões. We also ate dinner there and both the food and music were superb!
http://cantodocamoes.com/