If you are doing it strictly for development purposes, then there shouldn't be any problem with just running a local instance of sql server.

Personally, I run everything inside virtual machines so that I can get a little more structure and test how machines will interact with each other. I've gone as far as to configure a virtual domain, in order to test AD security etc. I also like the ability to snapshot machines, and revert to them when testing out methods that could end up making a mess. In my own department I have been advocating the use of virtual machines for sql development.