The Phantom of the Opera is based on a series of stories and rumors told about the Palais Garnier, an opera house in Paris that remains open today. In the prologue to the novel, Gaston Leroux talks about the research he did to prove that the legend of the Phantom is true in preparation to his writing. Leroux maintained that he believed the phantom was real until his death.

The strange stories that inspired Leroux began during the initial construction of the opera house, following news that it was being built over a subterranean lake. This lake does in fact exist and is even used today. The event where the chandelier comes crashing down is also said to be rooted in truth. The Phantom of the Opera is certainly a novel that is deeply tied to its setting.

The setting of the Phantom of the Opera is the Paris Opera House, also known as the Palais Garnier. It was an actual theater that opened in 1875 and was commissioned by Napoleon III. The chief architect of the project was Charles Garnier.

In Phantom of the Opera, several areas of the Palais Garnier serve as settings for the plot. One example is the Foyer de la Danse. In the 19th century, subscribers were allowed to mingle in the foyer. The story tells us that subscribers to at least three performances a week were allowed to congregate in the foyer. It is mentioned that the entire back wall of the foyer is covered in glass and that the foyer is lighted by a chandelier with one hundred and seven burners. On the walls are twenty paintings on oval medallions of the most famous dances in the history of the Opera House. There are also four panels with depictions of the "The War Dance, The Rustic Dance, The Dance of Love, and The Bacchic Dance."

Today, only dancers are allowed in the Foyer de la Danse. The story also mentions the singers' foyer, which is adorned by thirty panels that depict artists of great renown. 

One important setting in the story is the lake that is located in the lower cellars of the Opera House. Count Philippe's body is said to have been found on the bank of this lake. Today, however, Pierre Vidal, the curator of the Opera House's library and museum, reports that the lake is actually a stone water tank used for swimming practice by Paris's firefighters. In the story, the Phantom is said to have the run of the lower cellars, passageways, and lake area. He takes Christine on walks along the banks of the lake and once rows her out on the lake in a boat. The narrative also tells us that Erik, the Phantom, lives in a "house" on the lake. So, the fictitious lake in the lower recesses of the Opera House is a major setting in Gaston Leroux's story.