This debate rages on the internet (in the rec.arts.disney.parks newsgroup) frequently. I must admit, though, that I am totally, 100%, absolutely, positively, definitely, utterly, thoroughly, entirely, wholly, altogether, and unconditionally convinced that any trip to WDW should include staying at a Disney-owned and operated hotel. There's just too many reasons for staying on site that I can't stand to spend a whole trip to Orlando in an off site hotel (they're listed below, just be patient).
Having said that, I must admit that the prices offered by many of the chain hotels in the area is an enticing draw. On some trips, my wife and I compromise between the magic of staying on site and the cost of staying off site by splitting the difference and spending part of the trip on and the remainder off site. A key to making that work is that we try to enjoy the on site time at the end of the trip, rather than the beginning....so we don't feel "let down" when we have to move out of our Disney accommodations to move into a just a "regular" room. Another way I "justify" (again, remember I'm a purist that would stay on site all the time if finances permitted) staying off site is that you can schedule visits at non-Disney attractions in the area on those days..
Another less severe compromise strategy that I've used, and a lot of other WDW veterans would agree, is to stay at a less expensive off-site motel on the day you arrive in the Orlando area and perhaps the day you leave. Since most people don't arrive until mid-day or later, it can be a lot less expensive to stay away from WDW for a night, without adding much inconvenience. If you do arrive by mid- afternoon or so, there are several things you can do to "get hyped" about the rest of your trip. For example, you can spend time at the WDW shopping village or Pleasure Island, have a meal at any of the resorts, or even spend some time in the parks if your plans and admission media permit (if you have an annual pass, for example, you might not mind spending only a part of a day in the parks).
In any case, here's a list of why I'm sold on Disney accommodations:
Price... Disney hotels are expensive, but not excessively so for the quality. A room at the Contemporary, at about $200 per night (not including tax), is certainly competitive with one at the Hilton at close to the same cost. Also, there are several lower cost hotels (Caribbean Beach, Port Orleans Riverside, Port Orleans French Quarter, and Coronado Springs) that are much less expensive than the "premium" hotels.
Service... Disney "cast members", as employees are called, can be as good or as bad as any other hotel or resort employee, but most of the time service at Disney-owned and operated resorts is above average or high. On the rare occasion when you do have a bad experience at Walt Disney World you, as the "guest", have recourse. Asking to see a manager provides instant gratification, as long as your wishes are not totally unreasonable.
Atmosphere... The Disney-owned and operated resorts at Walt Disney World are each themed in a particular way. See section below, entitled "Which Disney-owned Resort Should I stay at, then?", for more details of the themeing of the various Disney Resort hotels. Also, in my experience, the rooms in the Disney hotels are nicely furnished, quiet (you don't hear noise from your neighbors at all), and reasonably large (given the price you pay).
Early Entry... Guests of Disney Resorts are allowed to enter a different theme park each morning about an hour and a half before the general public is permitted access. During these "early entry days", you can see and do as much in that first hour as you might in three or four hours at a busier time of the day. It's a nice way to get a good head start on everyone else.
Resort Delivery... Another wonderful perk is the delivery service that is available to WDW resort guests. Any item purchased in any store in the parks or at Downtown Disney can be sent to the front desk of your resort. This can be an incredible convenience when you are in the middle of the day at the park, but see an item you just have to have. (One caveat, your items are usually delivered by noon of the day following your purchase. If you want your item in your room that very day, or you are checking out of your resort later the same day (or early the next morning), you are out of luck. As a result, you might want to consider doing your gift and souvenir shopping before the last two days of your visit.)
Proximity... Of course, being right on Walt Disney World property, the Disney-owned and operated resorts are closer to the theme parks than any non-Disney hotels. This is especially nice on long trips, when afternoon breaks from the parks might include a return to the hotel for a nap or swim.
Transportation... All guests of WDW resorts are permitted full use of Disney's extensive Transportation systems. (There's more information in the section below entitled "How to get the Most out of Disney's Transportation System".)
On the other hand, there are two major drawbacks to staying on-property:
Disney's Deposit Policy... If you make a reservation at a WDW resort, you are required to pay one night's stay within three weeks of making the reservations or else the reservations are deleted from Disney's reservation system. If you're staying for a week or more, a one night deposit might not be considered unreasonable, but if you're staying at a given hotel only for a day or two, the deposit is excessive. Either way, the policy is a pain, and a financial burden.
Price... You can certainly find a less expensive room just outside of WDW's borders. However, make sure you consider parking, gas, commuting time, and convenience when you make your decision.
Orlando has more hotel rooms than any city in the World with the possible exception of Los Vegas. Besides the 20,000 plus rooms on Disney property, there are thousands more along 192 in Kissimmee and International and Sandlake Roads in Orlando...and virtually all roads in between.
Rooms vary from small but nice to dirty and dingy to the major chains. Let the buyer beware is a good motto to keep in mind.
If you don't have the budget to stay on-site, there are three places I'd suggest you try to find any necessary information. First, you can thumb through a AAA tour book for motel/hotel information. Second, the Unofficial Guide has a fairly complete list of local motels (along with reviews). Third, I'd suggest you look through the offsite hotel reviews here in Brian Bennett's Disney Trip Planning Resource Net (you can access it from the main page of this web site.). There are many reviews by people with different taste and expectations, so you're sure to get a well-rounded viewpoint. Furthermore, the hotels/motels that are reviewed cover the gamut from expensive to dollar-saving, and from fancy to simple.
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