Well, you don't rewrite, just to rewrite. Rewrite it if it NEEDS to be rewritten. Otherwise, editing is fine. And the whole thing might not need to be rewritten. You might just need to rewrite some scenes or some parts of scenes. It depends on how much work you think it needs. I don't rewrite, I mostly revise. My point of the first draft is to get the story down from beginning to end and then I go through different levels of editing and add to my, usually, bare bones story.
What I do, is what I think anotehr poster suggested: When I finish the first draft, I use Save As, and save it marked as a second draft. I still have the first draft in it's entirety. Now, I have another version of it saved as the second draft that I'll make changes to. I keep doing this until the manuscript is polished, and my drafts do go into the double digits.
The first thing I do when it's time to edit is read through the whole manuscript again, and make notes in a separate Edit file as I read. I'm actually quite organized when it comes to this, haha.
My edits ALWAYS start with big-picture items (structural and storyline issues). This is also how professional editors handle it. If you start doing copy editing or editing for grammar and changing around sentences, then it could be a complete waste of time, if you decide the scene you've just spent an hour line-editing has no purpose and needs to be deleted. So you don't want to do the line editing and copy editing before you handle the structural issues. Make sure your scenes are in the best possible order and sometimes you might need to combine scenes or delete them or write a new scene to help develop something. Make sure your scenes, plots, and characters are fully developed. And make sure you've covered any plot holes/flaws. before you start the line editing.
There are a lot of books on the market that will help you with editing. I like Editing for Fiction Writers.
Going back to the drafts issue: It's easier for me to go through my manuscript and focus on only 1-2 things. and when that's complete, I Save As a new draft, read the whole thing, make more notes in my Edit file as I read, and then start the editing process again, focusing on another 1-2 aspects. When I actually get into the line editing, I might spend a full draft or two editing out -ly words if I feel I have too much. Then another draft I might spend going through looking for passive voice and knocking that out. though, the first draft is getting the story down - unedited. The second draft is spent on structural issues with the scenes and moving them around, deleting, adding, etc when needed.
Its different for everyone. You might have to experiment with different forms of editing to find which is most convenient and most efficient for you. Good luck with your editing!