The house was finished. The roof was on. The hole was drilled. Everything was ready to go except for one thing. I couldn't decide whether to put a finish on it or leave it alone.
The more I looked into it, the more I realized there wasn't one right answer.
For the houses I build, I keep things pretty simple. If I paint the outside, I seal the outside. If I leave the cedar natural, I usually don't do anything to it. Either way, I leave the inside unfinished. No paint, stain, or sealer. From what I've learned, it's better for the birds to leave the inside natural, so that's what I do.
If I'm painting one, I'll sand a few rough spots on the outside and smooth things out a little, nothing fancy, just enough to help the paint go on clean. Once the paint is dry, I usually brush on two thin coats of exterior spar urethane. Sometimes I'll add a third coat if I think it needs it. I'm not trying to make it shiny or waterproof it like a boat. I just want to give the painted outside a little protection from the weather.
Once everything is finished, I let the paint and sealer dry and cure completely before I put the birdhouse outside.
Cedar holds up pretty well outside without needing much help. If I wanted to keep that natural cedar color a little longer, I might try an exterior clear finish. But even then, I wouldn't expect it to look new forever.
So far, the painted houses are holding up well, and the natural cedar ones are doing what cedar does, turning a little gray. But still solid.
A note on what I found: When I was looking into this, Cornell Lab of Ornithology's NestWatch recommends leaving the inside of nest boxes unfinished and, if you paint one, applying paint only to the exterior.