Setting up wordpress - installation options and best place to host a test site

Hi
I'm new to wordpress. I usually use concrete5, but thought I would give wpmudev a try.

Wordpress installation for test site:
I'm redesigning an existing website. Whilst the setup and design is in progress I want to host the site at a different address. When completed and signed off, I then want to be able to move it and swap it with the old site at the correct address.

Where am I best setting up the test site? (not sure if any of these options make a difference)
1) On a sub domain: test1.sitename.com
2) In a folder: http://www.sitename.com/test1
3) Or on a separate domain name: http://www.sitenametest1.com

Wordpress installation options:
Using softlaculous to install wordpress, there are a few options i'm not sure about:

1) Enable Multisite (WPMU) - should this be enabled or not?
2) Auto Upgrade - there is auto upgrade for wordpress, plugins and themes - is it best to do these manually when notified.

Thanks for your help in advance.
Daniel