The choice of hotel depends purely on the purpose of the visit. If we are going on a family vacation just to relax, I would recommend a Hotel Sterling or a Hotel Landmark. Both the hotels are well maintained and have good service levels. Both the hotels are located close to the main town and the lake.
But if one is going there to do lots of physical activity, I would recommend Hotel Kumara Raja Palace. This one looks a bit removed from the main town, though not far from it. The roads leading to the hotel are an excellent treat for walkers and joggers. The main town itself is small and not overcrowded. But this place is even better with very little vehicular movement and so less pollution. We would see more of trees and less of human population here.
If an astronomy enthusiast happens to visit Yelagiri, he is well advised to stay off the main town. Even with a thin population, there is some light pollution that could blur the night sky. So one should look at staying far away from the main town. One such property is located near Mangalam Village by name YMCA camp. Managed by YMCA, it is a delight for any nature lovers. For astronomy enthusiasts, this is probably the last place available in Tamilnadu where one could spot milky way.