Is it possible to get mods onto Medieval II: Total War demo

You garrison troops by simply moving them into a settlement. It depends on the unit for free upkeep whether it can produce them. Castles cannot do it for free.

Although the difficult settings modify the aggressiveness of the AI, it does not improve the AI. It just adds income, building speed, attack, defence and moral bonuses to the AI. If you feel it was too easy you can increase the difficult by reducing spending in campaign, or spend less point in allocating troops in skirmish.

Human opponents are more difficult than AI. I suggest you should wait for Total War Rome II or other RTS games and you will have real challenges again.