So essentially I am stuck either investing out of the state (20% down) OR gambling with rent increasing (possibly negative cash flow for a bit). 

Unpermitted may not be a huge deal in some cases, but when it comes to egress and life safety issues you're gambling more than I closed off the dining room and made an extra bedroom.

I think there're a few cities in Ohio that have a good base of young professionals, colleges, and major sports teams (don't ask me why, but I think those three things bode well for a city). 

Buying a property that you know would be cash-flow negative from the start is gambling on appreciation.

This is because we have agents and sellers who're gambling with the current market and trying to attain REHABBED property sales numbers.

This is the bank's gamble to try to meet their criteria, for example, Lets say the market conditions are stable, and marketing times are 30-90 days according to the agents BPO, or an appraisal, the bank might be inclined to accept offer #1 with a 30 day close and keep the other 2 offers as back ups.

You also need to do proper research on the area such as the economy, sports venues, concerts, etc.

Or are private/HML investors willing to take gambles on new investors with no experience?

@Mike Dymski  UGH I saw this play a few times.. over the decadesHey we will buy it because in 2 to 3 years this will happen.now I think everyone knows that I am an appreciation guy... but that mind set is really gambling in my mind.. maybe not quite as bad with these low dollar rents.. but I have seen guys already in our market get stressed thinking 1800 rents and the build cost to either build new or reposition rents need to go to 2200 and that did not happen.. thereby caused stress to the partnership and in a few instance lenders getting tough as the loans are not meeting DCR's..  

@Eric Gamble We were beat to the deal.