The best area to stay in Gato Colorado is within the town centre itself, particularly around the main plaza, Plaza San Martín.
This central area is the heart of Gato Colorado, where you'll find most of the town's limited amenities. The plaza is a welcoming green space, often surrounded by local government buildings and a church. The streets immediately surrounding the plaza generally house the few guesthouses, small eateries, and local shops available. It's a compact and easily navigable area.
For travellers seeking a convenient and straightforward stay, perhaps as a stopover, the town centre is ideal.