Do you have the passive income to use for offset?

Depending on your income you might qualify for the "Small Landlord Exception" to take the loss. 

The income aspect is a little different though, because you will not be able to verify, or they may not show income on their application if they don't have any. 

As our rental income is building up in the bank account now, we are wondering how to finance the next one.

Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

While the new property may bring in additional monthly income, the increase in your monthly net may not justify the amount of new debt that you would be taking on.

I am self employed and try to minimize my W2 income. 

If I were to take it out on my 25th birthday and take the taxes and penalty (48% of my actual amount), I would need to earn a ~7.5% annual return over the next 35 years to break-even on my 401k that would earn an average of 7% over the same time frame. 

My debt to income ratio isn’t great considering my current mortgage

Has been working well from 2008 onwards till date, but you should have capital and should have alternate income to support the property expenses.