Best way to migrate/test new template before changing over?

I currently use Hitmusic (by gavick) and plan to change over to Music City soon.. i plan to change a few things around and want to run them side by side till i have everything perfect....im throwing around some ideas to do this:

1) create an exact copy of the database, install the new template to my domain but like /site2 or something, and do all tests there..
2) just install the new template to /site2 or something, make all changes there.. but point it to the EXISTING LIVE DATABASE...

the problem with #2 is i might be using some components/modules/etc that aren't in the current site, also i'll be re-arranging things and dont want it to affect the current site..

but the problem with #1 is the database wont be current... if i was confident i could get everything up and running within a day or two that would be fine but realistically i think i need like 2 weeks to fine tune everything..

what is the best way of running the two sites side by side till im ready to swap over?

Thank you!

oh i should also point out my old site is joomla 1.5 and the new one apparently will be 2.5???? =(

does that make this upgrade even more difficult ?