Objective: Confined to a particular stage of social development, most existing communities in China have been designed with young and middle-aged people as the targets, neglecting the housing needs of the elderly. In addition, there is a considerable lack of elderly facilities and support services in community living areas. Therefore, expediting the development of age-friendly communities is a crucial initiative to improve the living environment of elderly residents and address the effects of aging. The development of age-friendly communities is an urgent topic that demands immediate attention. Unfortunately, there is still no systematic evaluation study on the effect of establishing age-friendly communities. Methods: Using data from a survey of residents of Beijing's first batch of national model age-friendly communities, we examined the effect of age-friendly community establishment on the life satisfaction levels of the elderly as well as the mediating role of their mental health. We also tested the robustness of the results based on a propensity score matching model. In addition, subjective and objective indicators of the seven functions of an age-friendly community were used to test the effectiveness of the age-friendly community functions. Finally, we employed grouped regression to test the heterogeneity of age-friendly community well-being among different elderly groups. Results: The results demonstrate the following: (1) The establishment of age-friendly communities enhances the life satisfaction and mental health of the elderly, and their mental health mediates the relationship between the establishment of age-friendly communities and their life satisfaction. (2) The seven functions of age-friendly communities affect the life satisfaction of the elderly to varying degrees, and only four functions—community atmosphere, community service, smart elderly care, and social participation—improve the mental health of the elderly. (3) The establishment of age-friendly communities more strongly affects the life satisfaction and mental health of older people who are younger, more capable of self-care, more educated, and lower income group. Conclusions: The abovementioned results show that overall, China's current age-friendly communities have achieved some success; however, some aspects still require attention during the follow-up promotion of age-friendly communities. First, when promoting the establishment of age-friendly communities, we should not only focus on improving the physical environment of the community but also consider various aspects of the social environment to help alleviate the mental health problems of the elderly. Concurrently, we should give more attention to the needs of vulnerable groups, such as the elderly with low education levels, limited self-care ability, and low incomes. We should implement policies such as home care, group assistance, and simplified and inexpensive procedures so that the benefits of age-friendly community establishments can be enjoyed by as many people as possible.