Film student Alex Wright and his friends wants to produce a film about the original Grave Encounters movie. Alex believes that the first film was real, despite his friends' objections. He posts an online plea for any information about the film and receives a message from someone named "DeathAwaits666" who lives next to the hospital. They offer to help with the film's research. The message leads Alex to the mother of Lance, the original movie's director. She believes that Lance is still alive, but they discover that she has severe dementia and does not realize that her son is dead. Alex finds out that the cast from the first movie are all missing or have died. He gets a mysterious message leading him to meet the producer of the original film. Upon confrontation, the producer confesses that the film is true. Alex and his friends (Tessa, Jared, Jennifer and Trevor) travel to the hospital. When they first arrive a security guard forces them to leave. At their hotel, Alex discovers another message from his online contact instructing the group to meet at a room found in the service tunnels. They sneak back to the hospital and cut the chain locking the doors. The group sets up their cameras and locate the room, only to find it empty.
They discover a Ouija board has been carved into a table in the room. Using it to communicate with the spirits they realize that their online contact is not a person, but a paranormal entity. They are instructed to film everything. The spirit then violently throws the table across the room. The group flees and hides in another room. They barricade the door, which is broken down by the security guard who noticed the open front doors. He forces them into the lobby, but once there, they hear heavy footsteps on the floor above. The security guard ignores the group's warnings and goes to investigate. They hear gunshots and run upstairs. The security guard is gone, leaving his flashlight and some bullet casings on the floor. Panicked, Alex finally agrees to leave but not until they gather all the cameras.
They split up to finish quicker. While he is retrieving a camera, an entity shoves Jared out of a window, killing him. After reviewing the footage, the group realizes what has happened to him and frantically try to find a way out. As in the original film, they are met with walls where the exits should be. They find the pediatric ward, where they see a moving rocking horse. Alex approaches but the rocking stops. They then notice a young girl on one of the beds, brushing her hair. She speaks to them, but then contorts her face and chases them out of the room. Panicked, Tessa runs ahead of the others around a corner. Before the rest can join her a wall closes up separating her from the rest of the group. She is then violently attacked and her skull is crushed, killing her instantly. Her body is then dragged away.
The surviving students continue to wander in search of an exit and discover the security guard. He is strapped to a gurney, hooked up to an electroshock machine, used to give patients seizures and possibly send them into remission. Despite their attempts to free him, he is electrocuted. The three remaining students then continue their search for a way out. They discover a window with a thin metal grate. Trevor pries it open, only to be attacked by a creature. They suddenly find they are able to exit the building. In front of the hospital, they find the security car with lights and sirens running; the mutilated body of Jared is sprawled across the hood. They run to their van and flee, returning to the hotel room.
They pack their things to return home. However, after they get into the hotel elevator, the doors open up to hospital tunnels, revealing that their "escape" was just an illusion. They wander down the tunnels until a pipe bursts, spraying steam and temporarily splitting them up. Once they regroup, they are confronted by Lance, who sprints up to them and directs them to follow him. He leads them to a hidden room, in the air conditioning system. They discover that Lance has been living in the building for over nine years, subsiding on rats and water from the hospital toilets. It is obvious that Lance is incredibly insane. He claims to be able to communicate with the building's entities, due to the lobotomy performed on him by Dr. Friedkin. Lance shows them a red door that stands in the middle of the tunnel.
He tells them it is the only way out, but it is wrapped in chains. The group tells Lance that they have bolt cutters that could break the chain, but their bag of tools was lost. Lance leads them back to the hospital to find the bag. After successfully retrieving the bolt cutters, Lance tells them to rest for a while. While they sleep, something picks up one of the cameras and films them. Trevor wakes up and takes a camera to record his last will and testament. Lance follows and kills him, claiming the entities made him do it. Alex and Jennifer wake to find Trevor's body and discover Lance and their equipment have disappeared. After comforting Jennifer with the promise that he will not let anything happen to her, Alex sees that Lance left his map behind. Lance is shown filming himself while traveling to the red door. He cuts the chains and enters, only to realize the door leads to nowhere.
Frenzied, he begins talking to the entities, who answer by writing on the wall. They instruct Lance to "finish the film" so it will draw more curious thrill-seekers to the hospital. But only a single survivor will be allowed to leave. Meanwhile, Alex and Jennifer wander the tunnels, looking for an exit using Lance's map. They enter the surgical ward and see Dr. Friedkin's satanic altar. The lights flash on, and the pair hides. They see the doctor and his nurses bring in a patient and perform a lobotomy. The nurses then present an infant to Dr. Friedkin, who sacrifices it, draining its blood all over the patient. One of the nurses hears Jennifer's terrified whimpers. She approaches their hiding place, so the couple flees in horror only to find themselves back at the red door.
Lance appears and demands they hand over their tapes. Alex refuses and Lance tries to kill him. During the struggle, a void opens up on the wall and sucks Lance in. Alex, in the meantime, has realized that Lance was being honest in how to escape and he smashes Jennifer's face in with the camera. He then turns the camera on himself, promising that he will finish the film and will not let the demons down. He exits the hospital through the red door, now that he is the lone survivor and has promised to finish the film.
Alex is then shown wandering the streets of Los Angeles, where he is arrested. The last scene shows that the footage has been made into a film, with the producer of the Grave Encounters films heaping praise on Alex's talent for filmmaking and claiming that everything the public sees has been staged. In a post-credits scene, Jennifer admits to Tessa that she has feelings for Alex after the party while a camera was rolling before the night of their travel to the hospital.