Your unfortunate experience is summed up in the word ‘trust’.

As far as down payment, investment properties typically require a minimum of 20-25% depending on property type, FICO, level of experience, occupancy %, etc.

Could you please share your experience of how you go through these obstacles and how do you choose your state and properties to invest in (if you are investing in tax deeds as well)? 

I am hearing you when you say you had the builder fix the grading issue, but grading is in my experience the #1 cause of repeated water in the basement.

Initial budget $250-600k +- Please advice if it's seems like an ok plan in your opinion (preferably if you have personal experience). 

This will give you some hands-on experience and an opportunity to put into practice what you have learned from reading the book.

Hard Rock Hotel (Downtown San Diego) has offered investment ownership opportunities for certain rooms within their establishment... has anybody had experience with this or horror stories of such investments?

Do you have any prior experience with real estate investing?

I appreciate all the insight and for the most part I do agree with you all on this being the typical experience with STR's.

You can of course do it yourself, but I think hiring expertise who has lots of experience talking to the appraisers, working for other investors, and potentially going in front of the board and potentially arbitrators is probably money well spent.