To start a hole if your not using a drill press, take a scrap peice of plywood and cut a hole just slightly larger than the diamond holesaw then clamp it in place and it's a snap to start the hole.
For the water dam, plumer's putty works great, about $ .89 at HD.
It's also good to put masking or duct tape over the inside of the hole to minimize chipping and keep the slug from falling into the tank, as the bit comes through.
Also, for lubricant, I can bring some diamond cutting lube to a meeting for you. Water works, but the lubricant can't hurt. Send me a PM if you'd like some.
jk