First, the rock. Limestone works best. The chances are that there is a lawn and garden dealer, if not a bulk rock distributor/brick company in your area that carries a wide assortment of stone. As for the shape, there are several options. 4" x 4" limestone edging works well (at least for this example). It comes in different lengths and is usually cut smooth on at least two sides. The reason why it works well is because you can cut it into blocks. These blocks can act as stable bases that you can then stack other rocks on top of in order to build caves. 2"-thick flagstones also work quite well. You can find these in small pieces or huge sheets. The second thing you’ll need is an electric drill with a masonry bit. I recommend using a 0.5" bit. The bit should last a while if you’re only using it on limestone. The third item you will need is an auto body hammer. This comes in handy for chiseling away any uneven, sharp, or otherwise unwanted spots. And then goggles, of course.
Now for the rock work. Simply draw your future hole on the rock with a pencil, then drill holes around your shape, leaving a ¼" between them. Avoid getting too close to the edge of the stone (a couple of inches is a safe limit). Once you do this, connect the holes by drilling from hole to the next at approximately a 45-degree angle. Before you know it, the center pops out and you’re nearly done. Now, using a body hammer, tap out the high points. Just tap on these spots; there is no need to pound on it.
When making caves with the 4" x 4" blocks, just drill in from different sides and then connect them. Use the body hammer to clear out any unwanted debris inside the block. And if you want to cut these blocks into shorter segments, just chisel a line all the way around the block with a chisel and a hammer.
In addition to limestone, lava rock can also be sculpted using a sand blaster. It will cut holes and carve out caves pretty well, but if you haven't sandblasted before, it can be frustrating. □