I was dead-set on staying in a restored colonial while in Granada, and this place fit the bill. They have beautifully restored, HUGE rooms, set around a lovely courtyard. They just added a small pool which was perfect to cool off in (it is really, really, hot in Granada in the middle of the day). Everything is fashioned our of beautiful hardwoods and they have THE most comfortable hammock we ever sat in while in Nicaragua! During our visit they were near completion of adding about five more rooms. We got a private room with it's own bathroom and paid $15 per person; dorms are also available for less $. The place is kept very clean for Nicaraguan standards, and our bathroom had HOT water (something hard to come by in Nicaragua, especially for this price! The only problem was that in our room, the 'hot' and 'cold' taps were backwards... it only took us two showers to figure this out though). There is a large open kitchen that you can use and store your things in, and they have free coffee available in the mornings. There are tons of rocking chairs, tables, and a 'livingroom' area to hang out in too. They had cable tv, free wifi, and lots of interesting Nicaraguan books scattered about the common areas to read.
The location of this place is great also - it is right across the street from Iglesia La Merced and is very quiet, yet close to everything. You can walk to Parque Central in about 3 minutes, and the market is about 3-4 blocks away. Anything you need is withing walking distance. Although centrally located, the hostel itself was really quiet suprisingly. The church across the street does ring it's bells in the mornings, but we found this a pleasant way to wake up each morning, as the sound was beautiful!
Besides being cheap, clean, and located in a great area, another thing we loved about this place was the staff. They were SO friendly and helpful. I was sick when we arrived and they even offered to go get me medicine! They were really helpful with anything we needed, gave us directions, and recommended a great restaurant. Thank you Rosa and Maria for all of your help!
The ONE downside to this place is that it is hard to find. Our cabbie had no idea where it was, and when we tried to get directions from anybody, they had no idea how to help us (even when we had a map). If you can get your cab driver to drop you off at 'Iglesia la Merced' it's the pink/purple-ish building across the street to the left of the church (if you are facing the church). There is also another hostal called 'Mochillas Inn' (which means 'backpacker inn' in Spanish), so don't be confused by that beacuase it is not the same place!
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