It is challenging to improve the water resistance, flame retardancy, mechanical performance, and balance of halogen-free flame-retardant polypropylene (PP) composites. For this purpose, a linear vinyl polysiloxane (PD) was synthesized and then self-crosslinked under benzoyl peroxide to prepare surface-coated ammonium polyphosphate (APP@PD). Apparently, this linear vinyl polysiloxane self-crosslinking coating strategy was completely different from the commonly used sol-gel-coated APP with silane monomers. After coating, the water contact angles (WCA) of APP and APP@PD were 26.8° and 111.7°, respectively, showing high hydrophobicity. More importantly, PP/APP@PD/dipentaerythritol (DPER) showed a higher limiting oxygen index (LOI) and better UL-94 V-0 rate in comparison with PP/APP/DPER composites. After water immersion at 70 °C for 168 h, only PP/APP@PD/DPER kept the UL-94 V-0 rate and lowered the deterioration of the LOI, reflecting the better water-resistance property of APP@PD. Consistently, the cone calorimeter test results displayed a 26.2% and 16.7% reduction in peak heat release rate (PHRR) and total smoke production (TSP), respectively. Meanwhile, the time to peak smoke production rate (TPSPR) increased by 90.2%. The interfacial free energy (IFE) between APP@PD and PP was calculated to evaluate the interfacial interaction between PP and APP@PD. A reduction of 84.2% in the IFE between APP@PD and PP is responsible for the improvement in compatibility and the increase in flame retardancy, water resistance, and mechanical properties of the composites.