The sentence you wrote is mostly correct, but it can be improved a little to sound more natural and clear. Here is the corrected sentence:
"The beaver builds its home from sticks and clay in the water, and its entrance is hidden underwater."
Explanation: We connect the two ideas with "and" to make it smoother. Also, "hidden underwater" is a good way to describe the entrance.
If you'd like, you could also say:
"The beaver builds its home in the water using sticks and clay, and its entrance is hidden underwater."
This version tells exactly where the home is and what it's made of in a clear way for a 7-year-old to understand.