The past several years, I have been able to find a weekend night for a hotel available using points. Marriott and/or IHG. Great redemption value, of course.
Otherwise, yes. Hotels in the city are expensive.
As for "best local beer", I would have to put a vote in for Augustiner am Platzl, across the street from the big Hofbräuhaus.
While an admitted fan of Augustiner beer in general, when I visited they were tapping a fresh, wooden keg of Helles at the bar every afternoon. Can't confirm they still do it, but I have very fond memories...
Of course, when I visit O'fest it is for the atmosphere of the Wiesn tents. Unless I was in town for an extended visit, I would save other locales for other times.