Type of Tree
A sturdy tree that has other branches leading to it is a good place to install your squirrel house. This way, the squirrels have many different ways to access the squirrel house, by climbing the trunk, or by climbing other trees and walking along branches to get to where the squirrel house is located. If there are no trees with interlocking branches, install the squirrel house on the closest tree to your house, so the squirrels can use the roof as an access point to the squirrel house. As squirrels are fast and agile climbers, it's important to give them as many access routes as possible, which will make them feel more comfortable about coming and going.
Where on the Tree
Install the squirrel house about 10 to 60 feet up along the trunk, so that the squirrels are high enough to avoid any predators like cats who may try to climb up to them. Make sure the main entrance to the squirrel house is facing the trunk of the tree, so that the squirrels can still access it, but make the opening small--only large enough to allow an animal the size of a squirrel (or smaller) to access the hole. This will also protect the squirrel house from harsh, inclement weather. Position the house so that it is facing south, so that winter wind won't whip into it, and secure it to a branch with steel wire, so that it sits sturdily on the tree, even in the event of a storm.
Self-Standing House
If there are no suitable trees in your yard for the squirrel house, put the squirrel house on a wooden post, much like many birdhouses are built. This way, the squirrel house will be isolated high off the ground and the squirrels will really be the only ones with access to it. Other posts can be installed around the squirrel house to allow more ways to climb up and down. This setup can be constructed close to the house as well, which will help keep predators away.