I've done some of these professionally with a saw.
Step 1: Cut off a face plate. 2 angled cuts, top is angled upwards, bottom is angled downwards (plate will sit in this cut when put back). Bore cut between the cuts to take off the plate, about 20% of tree diameter.
Step 2: Cross hatch bore out hollow in center of face plate area, have lower cut facing slightly down for drainage. Smash it out with hammer/bar.
Step 3: Cut shallow entrance to hollow on the tree so it will be under the face plate when it's put back. Size it for species of animal. Angled down prevents rain entrance.
Step 4: Screw plate back on.
Tools needed: Chainsaw, hammer or bar, screws, drill.
There is a new tool that acts like a snake that is far less damaging to tree, hollows out inside without a face plate. Much better but doesn't exist as freely like a chainsaw does.