Painting outside terrain editor.....
Perhaps I'm making something very simple difficult...
Sounds like you're doing it right.
Producing the waterd bitmap first is the way to go, it gives you the highest fidelity coastlines. Yes, when you then convert it to start your grndtype bitmap, you will need to do ground type touchup all along the coasts. That's because of the difference in the areas covered by the pixels in the two file types, but don't do any hand work until you're happy with all three files, elevations, ground type and shorelines.
Once you reduce it one step further for the elevation file, it's critical you're using a program like Photoshop or GIMP to avoid drawing mountains into your water areas. I usually produce a black layer for the water only, and lay it over the final elevation bitmap layer.
Once everything is imported back into the TE, run the Steep Water function, and set all the offending elevations to zero. That's the simplest and fastest way to render a basic terrain. Install a base or two out in the water and take a look in-game. If it's not quite what you want, you may want to rinse and repeat so keep backups of everything. Again, work the grndtype bitmap file before doing any hand work and get everything done that you can using the bitmap files.
After you have your elevations, ground types and coastlines, you can export the water files again and play with the depths and water colors, but be very careful as this can increase the res file size beyond 20 MB very quickly!
Good luck and remember to have fun.
