As im trying to setup multitenant erpnext, its quite hard to decide whether if i should use port based or DNS based.
Or is it possible to have my domain (site1.local/test) and install erpnext under each of (/xxx). So instead of having multiple server, I have (site1.local/test1, site1.local/test2, site1.local/test3) as different ERPNext.
You should use port based multitenant setup. You have some disadvantages on Port Based. You cannot have two tabs with two different logins to a port based multitenant setup, whereas you can if you do a dns based multitenant setup.
Your second paragraph goes over my head and hopefully somebody else more knowledgeable would be able to comment upon it.