As with all finishes, you should always sand the first coat of water-based finish smooth because it always dries rough to the touch. It’s also the best policy to sand additional coats smooth after they dry to remove dust nibs and other flaws, until the last coat, which you can leave as is.
Water-based finishes dry rapidly, almost as fast as the water evaporates from the finish. So the drying occurs quicker on hot or dry days and slower on cold or humid days.
How do you know when the finish is dry? It powders on the sandpaper and on the surface. If the finish isn’t dry, it will gum up the sandpaper, and it won’t powder.