Adding Subdomain Sites - Do I have to create a subdomain in my file manager?

I have multisite set up and its working great. My question is that if I want to add a subdomain via Add Sites. (i.e. california.mysite.com) Do I need to also add it through my FTP and upload wordpress to that subdomain? OR will the system take care of all of that for me? If the system will take care of this, how long does it typically take to take effect on the servers? Instantly?

The reason I ask is that I have set up a couple subdomains through the ftp which interact with the main site fine. The problem is that when I try to create a new site based on the template site that I created "template.mysite.com" it is giving me a basic wordpress install without ANY of the features from template.mysite.com. Very confused.