I agree with darthbimmer, unless the hotel you choose IS your destination, stay in Flag and make the 30 minute drive to Sedona.
For hiking, check out the Coconino National Forest website (http://www.fs.usda.gov/activity/coconino/recreation/hiking/?recid=54884&actid=50). Definitely make time for two or three hikes. The scenery is so much better when you get out in the forest. For lighter hikes, I'd recommend Doe Mountain, Boynton Canyon, and the West Fork Trail (this one requires a separate parking fee outside of the Red Rock pass. The trail also has several shallow water crossings).
Most of the Sedona area trailheads require a Red Rock pass for a small fee, available from self pay stations at major trailheads and the ranger station on highway 179 about one mile south of The Village of Oak Creek.