Unless you are renting a car, the best location for your hotel will definitely be in 101 Reykjavík,
the City Centre. This will put the downtown area all within walking distance
for you. You can arrange for transportation for almost any activity in
Iceland, but it is nice to have all the restaurants and most of the Reykjavík attractions close by.
Iceland Air owns a bunch of hotels, so you can typically get a good deal
on a hotel/airfare package as the non-tourist season draws close. You will
probably get the best room rates through Iceland Air, even at the hotels
they don't own. Go to the "Packages" link at the top of the home
page, and then you can "Build-Your-Own."
If you decide not to go the package route, there is an internet
special at the
Plaza Hotel of $114 to $152 per night for a standard double room.
This is a good price for Reykjavík, and there is the added
bonus that the Plaza Hotel is right next door to the reception restaurant.
We have never stayed in a guest house, but they seem to be more cost-efficient, plus they often include kitchenettes to cut down on the dining-out costs. One cute guest house that we have found online is Forsæla. If you and a group decide to book three rooms of the Forsæla house, you will have the entire home to yourselves!
If you are looking for a traditionally super fancy hotel, check
out the Hotel
Borg, which is supposedly where all the rock stars stay. Alternatively,
Hotel 101 is an extremely modern and chic boutique hotel. It is arguably
the nicest hotel in Reykjavík, and also the most expensive, so
maybe the rock stars stay here now.