I used a thin foam packaging sheet for the resist (the type that you wrap dishes in). It pliable enough that it is easy to remove once the hole is cut.
Wool tends to shed water and the shape of these birdhouses is such that it should encourage rain to just run off. We had some rain yesterday and the one I have hanging in the tree near the office stayed dry. I do expect that eventually it will get wet enough to start absorbing the water - I'll see what happens, but I expect it will hold up. I'd be more concerned about what sort living conditions that would be for birds inside - probably better than an open nest! lol!!!
I think hanging these under the eaves of a house or some similarly sheltered area would be the best. That would also protect them from squirrels that might decide the fiber would be really great in their own nests!!