The Germany international has set his sights on a meeting with the Liga champions and stresses that they will have to beat every opponent in order to win the competition
The Gelsenkirchen side finished first in Group B with 12 points from six games, whereas los Blancos had to settle for second spot in Group D behind Borussia Dortmund, and the Germany international is relishing the prospect of a potential visit to Madrid.
"We know it's going to be difficult, but why not, at 22 years old, play at Santiago Bernabeu? That would be a dream," Holtby told the official Uefa website.
"I don't really care who we play now, though. It's the Champions League. If you want to win it, you have to beat everybody.
"I'll just sit back when the draw comes up, happy to be there in the last 16."
Real Madrid have been knocked out before the quarter-final stage in six of the last eight seasons, though the two most recent campaigns have seen them reach the semi-finals under Jose Mourinho.
Schalke resume Bundesliga action on Saturday when they travel to Stuttgart.