Models need to be created and textured with third-party software, but the materials and models still need to go into the proper folders in order to be displayed in the game. If you have a model called mymodel.mdl, this model needs to be placed into its own folder within a subfolder of the models folder of your game. Wait, what? It's a common practice for each custom model to be placed within its own folder. If you had a box model called mybox.mdl, it would be in a folder called mybox within the mymodels folder within the models folder. For example:

SteamSteamAppscommonHalf-Life 2ep2modelsmymodelsmybox

The materials for your custom models go into the materials folder in a similar manner. The same folder structure exists beneath the models folder and the materials folder, yet one contains the .mdl files and the other contains the .vmf and .vmt files.

SteamSteamAppscommonHalf-Life 2ep2materialsmodelsmymodelsmybox

The folders get nested pretty deep and it can be pretty confusing at first glance, but everything is neatly organized. You will know that everything worked properly when you open the model browser and your model is there. If you can't see your model, it was compiled incorrectly or the pieces are in the wrong locations. Double-check everything!