Leather is best for you right now, Mithril soon follows. As for getting into the Palace basement, just shoot the patrolling guard in the back and walk in, then shoot the guy in there too. There is no Blood Price, so you can kill anyone you want (except the Blind Moth Priests, kill them and you get banned from the guild, permanently).
Oh, and the Wizard's Tower was released today. It's extremely nice, you get it for free and the furniture costs you no more than 6000 gold. Almost all the herbs in-game are inside and you can have an Atronach familiar. There's also an ice cavern at the top where you can store all your goods and get a buff/daedra summon alchohol from two gravestones. Upgrade it and you get a bunch of Imps who fly around and guard it. And ofcourse, jumping off the top of the tower at full speed is always nice.
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