The film opens with home video footage of Kristi Rey (sister of Katie from the first film) bringing her newborn son Hunter home (which is around the block from Katie and Micah's home in Paranormal Activity) from the hospital. We then follow Hunter through the first several months of his life via a montage of various video clips. During the montage, we meet Kristi's husband Dan; Ali, his daughter from a previous marriage (he is widowed); Martine, the family's housekeeper/nanny and Abby, the family's loyal German Shepherd.

After an apparent break-in and burglary of their home (in which the only thing stolen is a necklace that Katie gave to Kristi) Dan has a number of security cameras installed throughout the house. The family starts to hear noises and see items fall or move on their own. Martine, believing evil spirits are the cause, attempts to cleanse the house of "evil spirits", and Dan fires her after catching her burning incense. Katie and Kristi talk about being tormented by a demon or unknown spirit when they were children. Ali begins investigating the mysterious happenings. She discovers that on occasion, a human can make a deal with a demon for wealth or power by forfeiting the life of their firstborn son. She also realizes that until Hunter, there had not been a male child born in Kristi and Katie's family since the time of their great-great grandmother.

The violence continues to escalate, and Kristi is tormented further; the family dog, Abby, is attacked and pulled violently off camera and is seemingly knocked unconscious. Dan and Ali take the dog to the vet, leaving Kristi alone with Hunter. She goes to check on the baby and notices a light flicker off. She turns the light back on, but then is dragged by an unseen force out of the room and halfway down the stairs before she is released. Kristi runs back upstairs into Hunter's room but she is dragged back downstairs yet again. This time she is dragged into the basement where she stays for over an hour. Finally, the security camera footage shows the basement door opening on its own and Kristi stumbling through the living room in a trance.

The following day, Ali is at home with Kristi, who won't get out of bed. After hearing noises, Ali finds Kristi ignoring Hunter but demanding Ali leave the baby be. The security camera footage stops, then starts again with Ali crying downstairs awaiting Dan, who says he must see how Kristi is doing. Ali, who has now watched the security tapes from the night before, begs him to view the footage of Kristi's attack. Upon seeing the footage, he immediately calls Martine, who then prepares a cross that will pass the demon onto another blood relative, and that Kristi will have no memory of having been possessed. Dan tells Ali that he is going to pass the demon onto Katie so that Kristi and Hunter will be saved.

That night, Kristi violently attacks Dan and snatches Hunter, who chases her into the basement and touches her with the cross, who screams and collapses. The next scene shows Dan putting Kristi to bed and then burning a photo of a young Katie (which Micah later would find in the attic of their house, as depicted in the original film).

Three weeks later, Katie visits and explains how things have now begun happening at her house. After Katie leaves, we see her arrive at her and Micah's house, where he has just purchased the camera, as depicted in the opening scenes of Paranormal Activity. The next scene cuts to the night after Micah is murdered. Katie, possessed and bloodstained from the murder of Micah, breaks into the home and kills Dan and Kristi. The final scene is Katie leaving the room with Hunter. The ending credits say that Ali was on a school trip and returned home to find her father and step-mother dead. Katie and Hunter's whereabouts remain unknown.