I do maybe 95% of testing on a VM. It is way faster and much more convenient. I do test on real hardware regularly though. It's always cool to see stuff actually running on bare metal and bare metal is not as forgiving as VMs can be.

Generally I decide a feature I want to add. Then I do a general overview of the corresponding specifications and sometimes look at how already existing OSs handle that. I try to make some kind of mental model about the system and what it needs. Then I basically just write what ever I come up on the spot.

I have a really bad habit of not writing docs or taking notes. Basically I just hold everything in my head (and forget about it when I would need that information again). For some more complex stuff I do draw diagrams and write notes but I pretty much only keep those locally for myself.