Setting up dev site with WordPress

I’d like to set up a dev site with WordPress for a website that is currently hosted elsewhere. Once I get everything working the way I want it, I want to simply point the DNS nameservers to Dreamhost and have the site go live.

Here’s where I’m stuck. Since my domain is hosted elsewhere, how do I set up a dev site? Where? On what domain?

Thanks for you help.

Set it up as a domain.

In the diagram where is says, it should say as specified in Step 2 of Getting Started.