Charlie and the Champ by Royal C. Darrah

Shortly after Charlie is left at the orphanage, he realizes that any boyhood happiness he once had was doomed.
Charlie hadn't been there long before he heard terrifying rumors floating through the orphanage, tales of the old caretaker who cuts up orphans in his bloody dungeon in the orphanage basement. Late at night, said the boys, the caretaker would row out into the lake alongside the orphanage to feed the body parts to the sea monster who dwells in the deep dark waters of the lake.
Charlie is warned to never enter the orphanage's basement, but when his only prized possession is thrown down his dorm room's trash chute, he must somehow find the courage to enter the caretaker's abode.