Phelan blasted his defence, saying it was inexcusable to throw away two-goal leads at games at this level.
"If we had the whole of the New Zealand Army helping us we still couldn't have defended them," Phelan said.
"It was the same old story from us. We do everything right at training but it all goes out the window when we get to the game. It's a mental thing.
"Until people down here start to realise what we are trying to do here then we'll never have success."
The match was dominated by a strong wind, which led to spells of aerial ping-pong, but the home side's defence on balls coming from the flanks was average.
Otago made a great start to the match, and was 2-0 up within 15min.
It then went 3-1 ahead through a classy strike by midfielder Robbie Deeley, but Waikato came back with two goals by striker Steven Holloway, both off balls coming from the flanks, giving the visiting side a share of the points.
United striker Aaron Burgess set up the first goal after 11min, then scored the other to seemingly put United on its way.
He firstly fought hard down the right wing to win the ball and put in a smart cross for Tom Jackson to tuck the ball away at the near post.
About 5min later, referee Darren Sunborn ruled Waikato keeper Greg Walters had handled the ball out of the penalty box, and Burgess stepped up for the free-kick and rifled the ball into the left-hand corner of the net.
Otago made most of the running in the first half, with Burgess and captain Andy Coburn looking threatening, while Stu Kelly battled hard in the middle of the field.
Waikato gained more ball in the second half and showed a bit more muscle in midfield, and its persistence was rewarded when substitute Nick Robson jabbed in the ball after a goalmouth melee halfway through the stanza.
United kept attacking and just after the 30 min mark, Jackson offloaded nicely to Deeley to secure the two-goal advantage again.
But Holloway pounced from a long throw with 10min left, and just 5min later he met a corner with a powerful header to rob United of two points.
Waikato coach Dave Edmondson said he was grateful to come away with one point after what he said was an unacceptable first half from his side.
He said basic skills were missing from his side in the first half but it had come back well.
Otago United: 3 (Tom Jackson, Aaron Burgess, Robbie Deeley),
Waikato United: 3 (Steven Holloway 2, Nick Robson).
Half-time: Otago 2-0.
