The movie begins with the introduction of a new family, the Nelsons, who live in a quiet suburban neighborhood. The parents, Alex and Doug, are happily married with two children, Wyatt and his teenage sister, Katie. Charlize is a friend of Alex who takes care of her children often. Wyatt is shown to have an imaginary friend named Robbie, who he met after the new neighbors move in. As the story progresses, strange events begin to occur, such as objects moving on their own, electrical problems, and unexplained noises.
The new neighbor, a single woman named Katie, is accompanied by a young boy, Robbie, who she claims is her son. Alex becomes suspicious of the relationship between Katie and Robbie, especially after noticing that Robbie stays with Wyatt most of the time. As the days pass, the occurrences of strange events become more frequent. Wyatt begins to behave strangely and is seen interacting with Robbie, who is later revealed to be a demon. Alex realizes too late that Katie is not who she appears to be and that she is possessed by a demon.
The climax of the movie shows a possessed Katie attacking the Nelson family and attempting to take Wyatt away with her. During a struggle, Alex discovers the demon's true identity and decides to take action by setting up cameras in the house to monitor the demon's activities. She sets a trap to capture the demon but the plan eventually fails, and the demon succeeds in taking Wyatt away.
In the aftermath, the family is devastated by Wyatt's disappearance. However, the movie ends with a cliffhanger, where Robbie is revealed to be Hunter, Katie's nephew, who was kidnapped by Katie in Paranormal Activity 2. The demon has successfully possessed Katie, and it is uncertain what will happen next.