The air condenses when it cools. It can also condense after a drop in pressure.
Cheap compressors do not cool the air much and even worse, the output, tank and compressor all may be in one manifold. So hot air from the compressor goes straight out the output,
Cheap compressors also have restrictive 1/4" regulators; probably why the impact never did much. You need a 3/8" or 1/2" regulator and 3/8 hoses to get enough flow to run any serious air tool.
Other than putting a cooling coil on the compressor and replacing the regulator with one that has a good trap on it, there is not a lot you can do.
My old compressor used to output a lot of water. I had a second filter/regulator at the end of my hose that I used to set in a box as a stand and then a 15' hose to my gun.
Forget the Horror Freight separators; they are useless and you get what you pay for. All my stuff is Norgren. The tool port is all 1/2" fittings; my spraying port is 3/8" with a second filter. Never any water at the gun.--
Embedded Systems Consultant,
SHDesigns home - DIY Welder