recently had this exact same question over on turbobricks...
Your turbo is a Garrett T3 that is both oil-cooled and water cooled. Here is a diagram of one that is only oil cooled.


Notice there is a skinny oil feed line on top and a thick oil drain line on the bottom. These connections are required for a turbo to work, the oil cools and lubricates the bearing.
The two other connections on your turbo, marked with a green circle on the diagrams, are for water cooling. These connect to the radiator hoses. The one that is closer to the engine (marked with a green circle) connects to the ~1" thick hose that runs from the coolant reservoir to the radiator.
The one that is on the other side of the turbo (not shown in the diagrams) connects to the lower radiator hose.
To connect up the water cooling lines, you'll need to put metal "T" fittings in the middle of those two radiator hoses such that you can connect the turbo to them without restricting the flow of the radiator hoses.
From the factory all 240 Turbo's were only oil cooled, as well as 740 turbo's through 1986. 1987+ were both oil cooled and water cooled. The diagrams happen to be from a 1981 manual.
Make sure that the vacuum line marked "a" is in good condition and hooked up as shown. It operates the wastegate actuator. Without this line, your turbo will never open its wastegate and you will have infinite boost available. While this is fun, it also risks blowing up the engine. To adjust your boost, you can either buy a manual boost controller and fit it in-line in the line marked "a" or you can just adjust the wastegate actuator (circled in red).
Making the actuator arm shorter increases boost (by increasing the pressure that the wastegate will hold before it opens) and making the wastegate arm longer decreases boost.
For more information, please see the Turbo-compressor greenbook and the 1981 New Car Features greenbook at my website, www.k-jet.org
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http://www.k-jet.org
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