1 Regulator for 4 motors or 4 regulators?, connecting 3-5V dc motor to arduino
The eBay link to the motor did not yield any datasheet. So I will assume for the purpose of this answer that the motors are similar to the Precision Microdrives 106-002 motor, which has nearly identical dimensions and electrical specifications. 

The datasheet indicates a starting current of 180 mA at 3 Volts, and a no-load current of 17 mA at 3 Volts. Extrapolate that to the 22 mA current rating from the eBay listing, to a 233 mA starting current for the motors in the question. 

If the 4 motors are likely to be started or stalled simultaneously, it helps to design for this maximum current: 233 x 4 = 932 mA = ~ 1 A. For normal operation, this value becomes 22 x 4 = 88 mA = ~ 100 mA.

For a 5 Volt supply, we should thus allow for 1.5333 Amperes current, or at least 1.5 Amperes if we need to cut corners. 


  
  What setup is better?
  


The second one: Just use a MOSFET (or 4 of them, one for each if you plan to control them separately) to switch the low-side of the 4 motors. 


  
  Is regulating the 7.4V to the 5V max the motor need is a good idea?
  


Well, you do need to get the supply voltage down to within the motor's specified voltage range somehow. I might even get parsimonious and use 4 diodes such as 1n4007 in series to do the voltage reduction: End result, 4.6 Volts, so the motors will live a bit longer. After that, I'd drive all 4 motors from this rail, with the capacitors and diodes in place of course. 







simulate this circuit &ndash; Schematic created using CircuitLab


  Do I need 1 regulator and split the output 


Option 1: Single regulator for all 4 motors:







simulate this circuit


This would work fine, and a 1.5 A regulator would run pretty well on normal operation load of 22 * 4 = 88 mA = ~ 100 mA. For a linear regulator (e.g. 7805) the normal running dissipation would be around (7.4 - 5) x 0.1 = 0.24 Watts, which isn't much for a TO220 regulator package. 
Remember to add a capacitor of say 1 uF at each motor, parallel to the reverse biased diode already shown in the question, to bypass some of the commutation noise the motor must generate


Option 2: Separate regulators for each motor:


This would work fine too, but at the cost of a significant increase in part count: Each regulator will need a capacitor each, before and after it, besides the 4 regulators themselves. On the plus side, 4 regulators can dissipate heat better than one. 
Again, capacitors at each motor would help, but smaller values, say 470 pF each, in parallel with each diode would do fine, since the regulators themselves would protect the supply line from the commutation noise.


Recommendation: Note that this is a personal view... I would go with a single regulator and add the diodes + capacitors as close as possible to each motor