I think Morlaque hit the differences perfectly above. It is a bit more work to stay in an apartment. You need to organize the meeting and exchange of money and keys both coming and going....no front desk to help with arrangements (although many apartment owners have good ideas and are helpful) ....no breakfast (which usually comes with hotel) etc. etc. An apartment stay can be great and gives you in many cases more space and privacy but in Dubrovnik there are many choices for hotels and might be a bit easier. We like both type of accommodations but do find choosing an apartment is a bit riskier and sometimes less relaxing.

Considering you need to fit 5 people, I would especially choose an apartment, but to answer your question, that is just the way tourism has developed in Croatia. Residents converted floors of their houses, or properties they own separately from their home, into apartments to rent. It is one of the things I like the most about traveling there. I get a kitchen and often a terrace or balcony with view, for less than I'd pay for a subpar hotel in the US. I like that you get to interact with the owner in many cases, but often it is handled by a service--so not necessarily a personal interaction. You can often book it online just like you would a hotel, and see photos of the rooms as well as map the location.

I do think there is a lack of good budget hotels. If you want really basic or really extravagant, you are set. I do hear great things about www.dubrovnik-online.com/villa_adriatica/

ps old town will not necessarily mean no stairs, so check location carefully.

I did not take note of the 5 people...apartment might be good. In my search I had some excellent communication from Dubrovnik Apartment Source...they operate a bit different that most agencies and seem to have some very apartments of high standard. Recommended in various guidebooks and here on TA as well. With 5 I would consider an apartment although some hotels have what they call "family rooms" but the extra space in an apartment would be really nice.

I agree with the above. We chose an apartment to have a clothes washer and a kitchen - we didn't really cook but it was nice to have fridge for drinks and snacks. The apartment also had a great terrace which we used often.

We used Dubrovnik Apartment Source, mentioned in the above post, to rent our apartment. Their website is excellent - lots of info on the apartments they handle plus they were very responsive when it came to the questions we had. It was easy to book and process our deposit through Pay Pal. The owner was also in contact with us through email shortly after we booked. The owner of our apartment happened to live next door. We really didn't run into any issues but we could have reached him easiliy if we had.

We stayed in apartments in every destination we visited (Dubrovnik, Korcula, Hvar, Split and Trogir) and were very pleased with our choice to do so.