Yes, that way file paths never change and you shouldn't have any issues.
The one tricky issue that i didn't mention is having a URL to use for your site while it is in development. You will need some sort of URL to browse to those pages while developing, and if your only domain is going to the live version of your site - you won't be able to use that. So, you could create a subdomain of your current domain (i.e. dev.mydomain.com) and use that to navigate to your development pages.
Creating sub domains is usually an option from the Manage Domains page of your hosting provider's control panel.
"…when ready to go live. This won't be possible if you plan on using WebAssist extensions to modify a dynamic piece of functionality (i.e. Menu Writer menu/eCart functionality),…"
will I still be able to maintain said dynamic functionality?
If not, is the fix simply making sure all the paths are correct?
The point i was making with that statement is that you cannot use WebAssist extensions to modify PowerStore if it is only stored on your remote server.
If you intend to modify PowerStore 3 with our extensions, you will need to have a working version on your local server so that it can access the database when necessary. Then, after you have finished making the changes, you can upload them to your development folder, and import any database changes to the remote database.