If your existing VMs are virtual machine hardware version 4, then you can simply copy/import/restore/etc them into the new vSphere 5 environment. You are not required to do anything else to these VMs with the virtual machine hardware version or the version of VMware Tools. From there you could test to make sure everything works as expected with these VMs.
When you are ready to update the VMware Tools and virtual machine hardware, then power down the VM, snapshot the VM, update the VMware Tools and reboot, shut down the VM, update the virtual hardware, test and then delete the snapshots - or you could use Update Manager to greatly simplify this manual process.
There aren't many gotchas with the rebuild you are talking about, since the old environment will still be available and the VMs could be powered back on there if necessary.