The selection of a suitable location is a crucial prerequisite for the construction of an underground reservoir in water-scarce coal-mining regions, while there are few reports related. In this research, the geological influencing factors of water storage capacity of an underground reservoir were investigated. Caved sandstone provides effective storage space for mine water and mudstone in the floor prevents the mine water in the goaf from leaking downward. The water storage capacity of coal mine underground reservoir is positively correlated with the coal thickness, sandstone ratio of the roof, water storage coefficient, and effective safety thickness, and is negatively correlated with the elevation of the main coal floor and sandstone ratio of the floor. A mathematical model of water storage coefficient was established and a geological site selection method of a coal mine underground reservoir was proposed based on an entropy weight method. With a HJT coal mine in the Shendong coal mining area of China as a case study, the implementation of this method was elaborated. For an existing underground reservoir, located in the goaf of No. 12301 fully mechanized long wall mining face of No. 1−2 coal seam in the HJT mine field, the water storage coefficient (Q) and the site selection suitability index (SI) were 0.2194 (Q) and 0.544 (SI, at a good level). The estimated values were consistent with the actual situation, which may verify the accuracy and reliability of this method to some extent. SI was estimated for No. 2−2 coal seams and the suitable locations for the construction of underground reservoirs were predicted in this mine field.