I think Sterling to Madrid is highly unlikely, and I also think that it is highly unlikely that they will focus on Sterling this summer. They have Rodrigo who has been excellent from the right hand side, Hazard is apparently finally getting fit again, and Ancelotti as we saw likes playing Valverde from the right hand side too.
Sterling is an incredibly expensive deal to do when you factor in wages and transfer fee. And you'd be doing it with almost no resale value later on. I'm fairly comfortable that Madrid aren't the big option people think they are for him. Although I do agree that that's the one club that could potentially turn his head if they pushed hard.