First of all, there's no right or wrong in here. The do's can be in some groups don'ts to a certain extent and vice versa. What I'm trying to say here is that what really decides what works and what doesn't is your group. These are merely things that I've used and they worked or didn't work for me. I'm hoping, still, that it may help you.
Use the familiarity to your advantage
I think that this is the main advantage of using such a familiar setting. You can use all those familiar alleys and streets, all those familiar restaurants and the like. The familiarity gives you the tools to describe better than you could otherwise. You just need to place an event in the famous Italian diner and they all know what you're talking about. Furthermore, if something is ain't as it used to be it will jump to their heads immediately, thus shortening the expositions that you'll need.
Have some of the people they know in there
There are those people that you know to imitate pretty damn well in your area. They can be great NPCs, as you already know them and this time you don't have to illuminate them. They'll automatically know who you're talking about, and little glitches won't damage the way they perceive the characters. It is advisable, though, to limit them to supporting roles.
Place major events in familiar places to all of you
Although I've said it in the first section, I do believe that it deserves a section of its own. Place a murder mystery in your favorite diner, with the owner as the victim and they're gonna do far more for him than for everyone else in a fictional world. They know who s/he is, and they have an emotional bond to her.
Have some of the sessions in iconic places in town
If most of a particular session is going to take place in a square, why not playing the game in that square? Although it may be a little bit noisier and the like, they get the feel of the place, and they can search in real life. Maybe even hide some of the clues in the square as handouts.
Don't change too much…
The more you change, the less familiar it becomes. While this is not bad by itself, it surely takes from our goal here, of gaming in a familiar place. We still want them to feel that their in their own place, or all of the magic of GMing and gaming in your own town is lost.
…but don't leave it the same
We still want it to be a little bit different, though, or our hands are tied and so our possibilities. This means that something has to change. How much is up to you and your group, but it should be clear how much has been changed and how much remained the same.
Don't give familiar real-life persons center stage
They will always feel one of two options: too real compared to the characters or almost not real. While the first takes from the feel of the story and from the player's ability to connect to their characters, the second takes from the suspension of disbelief. Keeping them to the background enables you to enjoy from all of the believability bonuses from using them while keeping the negative side effects to the minimum.
And an end
These are my 2 cents on the topic. Hoping any of this will help you…